During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Sales (@ $64 per unit) Cost of goods sold @ $38 per unit) Year 1 $ 1,088,000 646,000 Year 2 $1,728,000 1,026,000 Gross margin Selling and administrative expenses 442,000 323,000 702,000 353,000 Net operating income $ 119,000 $ 349,000 * $3 per unit variable; $272,000 fixed each year. The company's $38 unit product cost is computed as follows: $ 5 11 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($374,000 = 22,000 units) 17 Absorption costing unit product cost $ 38 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: Units produced Units sold Year 1 22,000 17,000 Year 2 22,000 27,000 Required: 1. Prepare a variable costing contribution format income statement for each year. Heaton Company Variable Costing Income Statement Year 1 Sales | $ 1,088,000 Variable expenses: Variable cost of goods sold Variable selling and administrative expenses Year 2 $1,728,000 1,088,000 1,728,000 Total variable expenses Contribution margin Fixed expenses: Fixed manufacturing overhead Fixed selling and administrative expenses Total fixed expenses Net operating income (loss) $ 1,088,000 $ 1,728,000 2. Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses and deductions should be indicated with a minus sign.) Year 2 Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Variable costing net operating income (loss) Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing Absorption costing net operating income (loss)