Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $25 per unit. Lehighton uses an actual costing system, which means that the actual costs of direct material, direct labor, and manufacturing overhead are entered into work-in-process inventory. The actual application rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by actual production (in units) to compute the application rate. Information for Lehightons first two years of operation is as follows:

	Year 1			Year 2
Sales (in units)		2,900			2,900
Production (in units)		3,300			2,500
Production costs:
Variable manufacturing costs	$	13,860		$	10,500
Fixed manufacturing overhead		17,160			17,160
Selling and administrative costs:
Variable		11,600			11,600
Fixed		10,600			10,600

Selected information from Lehightons year-end balance sheets for its first two years of operation is as follows:

LEHIGHTON CHALK COMPANY
Selected Balance Sheet Information
Based on absorption costing	End of Year 1			End of Year 2
Finished-goods inventory	$	3,760		$	0
Retained earnings		17,540			33,720
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	1,680		$	0
Retained earnings		15,460			33,720

Required:

Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year.

Prepare operating income statements for both years based on absorption costing.

Prepare operating income statements for both years based on variable costing.

Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).