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During Heaton Companys first two years of operations, the company reported absorption costing net operating income as follows:

	Year 1		Year 2
Sales (@ $61 per unit)	$	976,000	$	1,586,000
Cost of goods sold (@ $35 per unit)		560,000		910,000
Gross margin		416,000		676,000
Selling and administrative expenses*		302,000		332,000
Net operating income	$	114,000	$	344,000

* $3 per unit variable; $254,000 fixed each year.

The companys $35 unit product cost is computed as follows:

Direct materials	$	7
Direct labor		10
Variable manufacturing overhead		1
Fixed manufacturing overhead ($357,000 21,000 units)		17
Absorption costing unit product cost	$	35
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 21,000 21,000 Units sold 16,000 26,000 Prepare a variable costing contribution format income statement for each year. Heaton Company Variable Costing Income Statement Year 1 Year 2 Variable expenses: Total variable expenses Fixed expenses: Total fixed expenses Reconcile the absorption costing and the variable costing net operating income figures for each year. (Losses should be indicated by a minus sign.) Reconciliation of Variable Costing and Absorption Costing Net Operating Incomes Year 1 Year 2 Variable costing net operating income (loss) Add (deduct) fixed manufacturing overhead deferred in (released from) inventory under absorption costing Absorption costing net operating income

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