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)	$	1,008,000	$	1,638,000
Cost of goods sold (@ $37 per unit)		592,000		962,000
Gross margin		416,000		676,000
Selling and administrative expenses*		297,000		327,000
Net operating income	$	119,000	$	349,000

* $3 per unit variable; $249,000 fixed each year.

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

Direct materials	$	9
Direct labor		9
Variable manufacturing overhead		3
Fixed manufacturing overhead ($336,000 21,000 units)		16
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	21,000	21,000
Units sold	16,000	26,000

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.)