Liwa Plastic companys first two years of operations, the company reported absorption costing net operating income as follows:

	YEAR 1	YEAR 2
Sales (at $25 per unit)	$ 500,000	$750,000
Less: Cost of goods sold: Beginning inventory Add: Cost of goods manufactured (at $17 per unit)	0 425,000	85,000 425,000
Goods available for sale Less: ending inventory (at $17 per unit)	425,000 85,000	510,000 0
Cost of goods sold	340,000	510,000
Gross Margin	160,000	240,000
**Selling and administrative expenses	155,000	170,000
Net operating Income	$ 5,000	$ 70,000

** Selling & Administrative expenses - $1.50 per unit is variable; $125,000 fixed each year

The company s unit product cost is computed as follows:

Direct Materials	$4
Direct Labor	5
Variable factory overhead	1
Variable selling & administrative	7
Unit product cost	$ 17

Production and cost data for the two years are given below:

	Year 1	Year 2
Unit produced	25,000	25,000
Units sold	20,000	30,000

Required:

a) Prepare a variable costing income statement for each year in the contribution format.

(4.5marks)

b)Reconcile the absorption costing and variable costing net operating income figures for each

year.