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During Heaton Companys first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $60

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) $ 1,080,000 $ 1,680,000
Cost of goods sold (@ $30 per unit) 540,000 840,000
Gross margin 540,000 840,000
Selling and administrative expenses* 334,800 364,800
Net operating income $ 205,200 $ 475,200

* $3 per unit variable; $280,800 fixed each year.

The companys $30 unit product cost is computed as follows:

Direct materials $ 6
Direct labor 8
Variable manufacturing overhead 4
Fixed manufacturing overhead ($276,000 23,000 units) 12
Absorption costing unit product cost $ 30

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 and deductions should be indicated with a minus sign.)

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