Lehighton Chalk Company manufactures sidewalk chalk, which itsells online by the box at $22 per unit. Lehighton uses an actualcosting system, which means that the actual costs of directmaterial, direct labor, and manufacturing overhead are entered intowork-in-process inventory. The actual application rate formanufacturing overhead is computed each year; actual manufacturingoverhead is divided by actual production (in units) to compute theapplication rate. Information for Lehighton’s first two years ofoperation is as follows:

	Year 1			Year 2
Sales (in units)		3,100			3,100
Production (in units)		3,600			2,600
Production costs:
Variable manufacturing costs	$	15,840		$	11,440
Fixed manufacturing overhead		19,440			19,440
Selling and administrative costs:
Variable		12,400			12,400
Fixed		11,400			11,400

Selected information from Lehighton’s year-end balance sheetsfor its first two years of operation is as follows:

LEHIGHTON CHALK COMPANY
Selected Balance Sheet Information
Based on absorption costing	End of Year 1			End of Year 2
Finished-goods inventory	$	4,900		$	0
Retained earnings		8,520			14,440
Based on variable costing	End of Year 1			End of Year 2
Finished-goods inventory	$	2,200		$	0
Retained earnings		5,820			14,440

1. Prepare operating income statements for both years based onabsorption costing.

2. Prepare operating income statements for both years based onvariable costing.

3. Prepare a numerical reconciliation of the difference in incomereported under the two costing methods used in requirements (1) and(2).