During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Sales (@ $63 per unit) Cost of goods sold (@$39 per unit) Year 1 5 1,260,000 780,000 Year 2 $1,890,000 1,170,000 Gross margin Selling and administrative expenses 480.000 306,000 720.000 336,000 Net operating income $ 174,000 $ 384,000 - $3 per unit variable: $246,000 fixed each year. The company's $39 unit product cost is computed as follows: $ 6 12 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead ($475,000 + 25,000 units) 19 Absorption costing unit product cost $ 39 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 25 000 20,000 Year 2 25,000 30,000 Required: 1. Prepare a variable costing contribution format income statement for each year. Heaton Company Variable Costing Income Statement Year 1 Year 2 Variable expenses Total variable expenses Fixed expenses: Total fixed expenses 2. Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses should be indicated by 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