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) $ 1,020,000 $ 1,620,000 Cost of goods sold (@ $36 per unit) 612,000 972,000 Gross margin 408,000 648,000 Selling and administrative expenses* 301,000 331,000 Net operating income $ 107,000 $ 317,000 * $3 per unit variable; $250,000 fixed each year. The companys $36 unit product cost is computed as follows: Direct materials $ 8 Direct labor 11 Variable manufacturing overhead 2 Fixed manufacturing overhead ($330,000 22,000 units) 15 Absorption costing unit product cost $ 36 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 22,000 22,000 Units sold 17,000 27,000 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.)

Prepare income statements using both variable and absorption costing. Reconcile variable costing and absorption costing net operating incomes and explain why the two amounts differ.