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

	Year 1		Year 2
Sales (@ $60 per unit)	$	1,020,000	$	1,620,000
Cost of goods sold (@ $35 per unit)		595,000		945,000
Gross margin		425,000		675,000
Selling and administrative expenses*		298,000		328,000
Net operating income	$	127,000	$	347,000

* $3 per unit variable; $247,000 fixed each year.

The companys $35 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		8
Variable manufacturing overhead		4
Fixed manufacturing overhead ($330,000 22,000 units)		15
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:

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