During Gates 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)

$

992,000      

$

1,612,000    

  Cost of goods sold (@ $38 per unit)

608,000      

988,000    

  Gross margin

384,000      

624,000    

  Selling and administrative expenses*

296,000      

326,000    

  Net operating income

$

88,000      

$

298,000    

* $3 per unit variable; $248,000 fixed each year.

The company's $38 unit product cost is computed as follows:

  Direct materials

$

7    

  Direct labor

12    

  Variable manufacturing overhead

2    

  Fixed manufacturing overhead ($357,000 ÷ 21,000 units)

17    

  Absorption costing unit product cost

$

38    

Production and cost data for the two years are given below:

Year 1

Year 2

  Units produced

21,000

21,000

  Units sold

16,000

26,000

Required:

1.

Prepare a variable costing contribution format income statement for each year.

2.

Reconcile the absorption costing and variable costing net operating income figures for each year. (Loss and deduction amounts should be indicated with a minus sign.)