During Heaton Companys first two years of operations, the company reported absorption costing net operating income as follows:

	Year 1		Year 2
Sales (@ $62 per unit)	$	1,240,000	$	1,860,000
Cost of goods sold (@ $29 per unit)		580,000		870,000
Gross margin		660,000		990,000
Selling and administrative expenses*		312,000		342,000
Net operating income	$	348,000	$	648,000

* $3 per unit variable; $252,000 fixed each year.

The companys $29 unit product cost is computed as follows:

Direct materials	$	5
Direct labor		11
Variable manufacturing overhead		1
Fixed manufacturing overhead ($300,000 25,000 units)		12
Absorption costing unit product cost	$	29

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	25,000	25,000
Units sold	20,000	30,000

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.)