During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $25 per unit)................................... $1,000,000 $1,250,000 Cost of goods sold (@ $18 per unit)................... 720,000 900,000 Gross Margin.............................................. 280,000 350,000 Selling and administrative expenses.................. 210,000 230,000 Net operating income.................................. 70,000 120,000 $2.00 per unit variable: $130,000 fixed each year The company's $18 unit product cost is computed as follows: Direct Materials...............................................................$4 Direct Labor...................................................................$7 Variable Manufacturing Overhead..........................................$1 Fixed Manufacturing Overhead.............................................$6 Absorption costing unit product cost......................................$18 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................................................. 45,000 45,000 Units Sold....................................................... 40,000 50,000

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.