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

	Year 1		Year 2
Sales (@ $62 per unit)	$	1,178,000	$	1,798,000
Cost of goods sold (@ $34 per unit)		646,000		986,000
Gross margin		532,000		812,000
Selling and administrative expenses*		311,000		341,000
Net operating income	$	221,000	$	471,000

* $3 per unit variable; $254,000 fixed each year.

The companys $34 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		8
Variable manufacturing overhead		3
Fixed manufacturing overhead ($360,000 24,000 units)		15
Absorption costing unit product cost	$	34

Forty percent of fixed manufacturing overhead consists of wages and salaries; the remainder consists of depreciation charges on production equipment and buildings.

Production and cost data for the two years are:

	Year 1	Year 2
Units produced	24,000	24,000
Units sold	19,000	29,000
Prepare a variable costing contribution format income statement for each year. Reconcile the absorption costing and the variable costing net operating income figures for each year.