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 (@ $37 per unit)		629,000		999,000
Gross margin		408,000		648,000
Selling and administrative expenses*		297,000		327,000
Net operating income	$	111,000	$	321,000

* $3 per unit variable; $246,000 fixed each year.

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

Direct materials	$	7
Direct labor		10
Variable manufacturing overhead		1
Fixed manufacturing overhead ($418,000 22,000 units)		19
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	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.)