During Heaton Companys first two years of operations, it reported absorption costing net operating income as follows:

	Year 1	Year 2
Sales (@ $61 per unit)	$ 976,000	$ 1,586,000
Cost of goods sold (@ $40 per unit)	640,000	1,040,000
Gross margin	336,000	546,000
Selling and administrative expenses*	296,000	326,000
Net operating income	$ 40,000	$ 220,000

* $3 per unit variable; $248,000 fixed each year.

The companys $40 unit product cost is computed as follows:

Direct materials	$ 8
Direct labor	11
Variable manufacturing overhead	3
Fixed manufacturing overhead ($378,000 21,000 units)	18
Absorption costing unit product cost	$ 40

Production and cost data for the first two years of operations are:

	Year 1	Year 2
Units produced	21,000	21,000
Units sold	16,000	26,000

Required:

2. What is the variable costing net operating income in Year 1 and in Year 2? (Loss amounts should be indicated with a minus sign.)

3. Reconcile the absorption costing and the variable costing net operating income figures for each year.

Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes
	Year 1	Year 2
Variable costing net operating income (loss)	not attempted	not attempted
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing	not attempted	not attempted
Absorption costing net operating income	not attempted	not attempted