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)	$	1,152,000	$	1,792,000
Cost of goods sold (@ $33 per unit)		594,000		924,000
Gross margin		558,000		868,000
Selling and administrative expenses*		304,000		334,000
Net operating income	$	254,000	$	534,000

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

The companys $33 unit product cost is computed as follows:

Direct materials	$	8
Direct labor		9
Variable manufacturing overhead		2
Fixed manufacturing overhead ($322,000 23,000 units)		14
Absorption costing unit product cost	$	33

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.)