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)	$ 1,098,000	$ 1,708,000
Cost of goods sold (@ $42 per unit)	756,000	1,176,000
Gross margin	342,000	532,000
Selling and administrative expenses*	300,000	330,000
Net operating income	$ 42,000	$ 202,000

* $3 per unit variable; $246,000 fixed each year.

The companys $42 unit product cost is computed as follows:

Direct materials	$ 8
Direct labor	12
Variable manufacturing overhead	2
Fixed manufacturing overhead ($460,000 23,000 units)	20
Absorption costing unit product cost	$ 42

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

	Year 1	Year 2
Units produced	23,000	23,000
Units sold	18,000	28,000

Required:

2. What is the variable costing net operating income in Year 1 and in Year 2?

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)
Add (deduct) fixed manufacturing overhead deferred in (released from) inventory
Absorption costing net operating income