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

Year 1Year 2Sales (@ $63 per unit)$1,134,000$1,764,000Cost of goods sold (@ $35 per unit)630,000980,000Gross margin504,000784,000Selling and administrative expenses*305,000335,000Net operating income$199,000$449,000

* $3 per unit variable; $251,000 fixed each year.

The company's $35 unit product cost is computed as follows:

Direct materials$9Direct labor11Variable manufacturing overhead3Fixed manufacturing overhead ($276,000 23,000 units)12Absorption 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 1Year 2Units produced23,00023,000Units sold18,00028,000

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.