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

	Year 1		Year 2
Sales (@ $61 per unit)	$	1,037,000	$	1,647,000
Cost of goods sold (@ $38 per unit)		646,000		1,026,000
Gross margin		391,000		621,000
Selling and administrative expenses*		299,000		329,000
Net operating income	$	92,000	$	292,000

* $3 per unit variable; $248,000 fixed each year.

The companys $38 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		9
Variable manufacturing overhead		5
Fixed manufacturing overhead ($396,000 22,000 units)		18
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:

	Year 1	Year 2
Units produced	22,000	22,000
Units sold	17,000	27,000

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.)