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 (@ $33 per unit) 561,000 891,000 Gross margin 459,000 729,000 Selling and administrative expenses* 298,000 328,000 Net operating income $ 161,000 $ 401,000 * $3 per unit variable; $247,000 fixed each year. The companys $33 unit product cost is computed as follows: Direct materials $ 7 Direct labor 9 Variable manufacturing overhead 3 Fixed manufacturing overhead ($308,000 22,000 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 22,000 22,000 Units sold 17,000 27,000

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.)