Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $23 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)		2,500			2,500
Production (in units)		3,100			1,900
Production costs:
Variable manufacturing costs	$	14,260		$	8,740
Fixed manufacturing overhead		17,360			17,360
Selling and administrative costs:
Variable		10,000			10,000
Fixed		9,000			9,000

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	$	6,120		$	0
Retained earnings		7,500			11,080
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,760		$	0
Retained earnings		4,140			11,080

Required:

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

1. Prepare operating income statements for both years based on absorption costing.
2. Prepare operating income statements for both years based on variable costing.
3. Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).