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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)	$	1,037,000	$	1,647,000
Cost of goods sold (@ $34 per unit)		578,000		918,000
Gross margin		459,000		729,000
Selling and administrative expenses*		323,000		353,000
Net operating income	$	136,000	$	376,000

* $3 per unit variable; $272,000 fixed each year.

The companys $34 unit product cost is computed as follows:

Direct materials	$	6
Direct labor		10
Variable manufacturing overhead		2
Fixed manufacturing overhead ($352,000 22,000 units)		16
Absorption costing unit product cost	$	34

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	22,000	22,000
Units sold	17,000	27,000

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 and deductions should be indicated with a minus sign.)

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