During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Sales (@ $64 per unit) Cost of goods sold (@ $35 per unit) Year 1 $ 1,024,000 560,000 Year 2 $1,664,000 910,000 Gross margin Selling and administrative expenses 464,000 304,000 754,000 334,000 Net operating income $ 160,000 $ 420,000 *$3 per unit variable; $256,000 fixed each year. The company's $35 unit product cost is computed as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($294,000 + 21,000 units) - 14 Absorption 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: Units produced Units sold Year 1 21,000 16,000 Year 2 21,000 26,000 Required: 1. Prepare a variable costing contribution format income statement for each year. Heaton Company Variable Costing Income Statement Year 1 Sales $ 1,024,000 Variable expenses: Variable cost of goods sold 336,000 Variable selling and administrative nses 224,000 Year 2 $ 1,664,000 / / / T / / 546,000 364,000 0 / / / / / / / / Total variable expenses Contribution margin Fixed expenses: 560,000 464,000 / 910,000 754,000 | / / / / / 11 Total fixed expenses Net operating income (loss) 00 464,000 $ 754,000 $ 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.) - Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Variable costing net operating income (loss) Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing Absorption costing net operating income (loss) LL N IT