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)	$	1,140,000	$	1,740,000
Cost of goods sold (@ $41 per unit)		779,000		1,189,000
Gross margin		361,000		551,000
Selling and administrative expenses*		305,000		335,000
Net operating income	$	56,000	$	216,000

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

The companys $41 unit product cost is computed as follows:

Direct materials	$	10
Direct labor		11
Variable manufacturing overhead		2
Fixed manufacturing overhead ($432,000 24,000 units)		18
Absorption costing unit product cost	$	41

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	24,000	24,000
Units sold	19,000	29,000

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 2. Reconcile the absorption costing and the variable costing net operating income figures for each year (Losses should be indicated by 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 costin Absorption costing net operating income