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

	Year 1		Year 2
Sales (@ $63 per unit)	$	1,134,000	$	1,764,000
Cost of goods sold (@ $37 per unit)		666,000		1,036,000
Gross margin		468,000		728,000
Selling and administrative expenses*		304,000		334,000
Net operating income	$	\164,000\	$	394,000

* $3 per unit variable; $250,000 fixed each year.

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

Direct materials	$	7
Direct labor		13
Variable manufacturing overhead		3
Fixed manufacturing overhead ($322,000 23,000 units)		14
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.)