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)	$	1,116,000	$	1,736,000
Cost of goods sold (@ $37 per unit)		666,000		1,036,000
Gross margin		450,000		700,000
Selling and administrative expenses*		301,000		331,000
Net operating income	$	149,000	$	369,000

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

The companys $37 unit product cost is computed as follows:

Direct materials	$	5
Direct labor		12
Variable manufacturing overhead		4
Fixed manufacturing overhead ($368,000 23,000 units)		16
Absorption costing unit product cost	$	37

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	23,000	23,000
Units sold	18,000	28,000

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.)