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)	$	992,000	$	1,612,000
Cost of goods sold (@ $39 per unit)		624,000		1,014,000
Gross margin		368,000		598,000
Selling and administrative expenses*		300,000		330,000
Net operating income	$	68,000	$	268,000

* $3 per unit variable; $252,000 fixed each year.

The companys $39 unit product cost is computed as follows:

Direct materials	$	9
Direct labor		9
Variable manufacturing overhead		4
Fixed manufacturing overhead ($357,000 21,000 units)		17
Absorption costing unit product cost	$	39

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	21,000	21,000
Units sold	16,000	26,000

Required:

1.	Prepare a variable costing contribution format income statement for each year.

2.	Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses should be indicated by a minus sign.)