During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@$60 per unit) $1,110,000 $ 1,710,000 Cost of goods sold (a $35 per unit) 647,500 997,500 Gross margin 462.500 712,500 Selling and administrative expenses 321,900 351,900 Net operating Income $ 1140,600 360,600 $ - $3 per unit variable: $266,400 fixed each year. The company's $35 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($329,000+ 23,500 units) $ 9 9 3 14 Absorption costing unit product cost $35 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 23.500 18.500 Year 2 23,500 28,500 Required: 1. Prepare a variable costing contribution format income statement for each year. Heaton Company Variable Costing Income Statement Year 1 Year 2 Variable expenses Total variable expenses Fixed expenses Total fixed expenses Net operating income (oss) 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.) 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 under absorption costing Absorption costing net operating income (loss)