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

Year 1 Year 2

Sales (@ $64 per unit) $ 1,088,000 $ 1,728,000

Cost of goods sold (@ $36 per unit) 612,000 972,000

Gross margin 476,000 756,000

Selling and administrative expenses* 301,000 331,000

Net operating income $ 175,000 $ 425,000

* $3 per unit variable; $250,000 fixed each year. The companys $36 unit product cost is computed as follows: Direct materials $ 6 Direct labor 11 Variable manufacturing overhead 3 Fixed manufacturing overhead ($352,000 22,000 units) 16 Absorption costing unit product cost $ 36 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: a. Prepare a variable costing contribution format income statement for each year. b. Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses should be indicated by a minus sign.)