Question: During Heaton Company's first two years of operations, the company reported absorption costing net operating income as follows: Year 1 Year 2 Sales (@ $62 per unit) $ 1,116,000 $ 1,736,000 Cost of goods sold (@ $30 per unit) 540,000 840,000 Gross margin 576,000 896,000 Selling and administrative expenses* 305,000 335,000 Net operating income $ 271,000 $ 561,000 * $3 per unit variable; $251,000 fixed each year. The company's $30 unit product cost is computed as follows: Direct materials $ 6 Direct labor 9 Variable manufacturing overhead 3 Fixed manufacturing overhead ($276,000 ÷ 23,000 units) 12 Absorption costing unit product cost $ 30 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 23,000 23,000 Units sold 18,000 28,000 Required:

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. (Losses should be indicated by a minus sign.)