Electron Inc. is a semiconductor company based in Winnipeg. In 2013, it produced a new router system for its corporate clients. The average wholesale selling price of the system is $1,200 each. For 2013, Electron estimates that it will sell 10,000 router systems and so produces 10,000 units. Actual 2013 sales are 8,960 units. Electron’s actual 2013 costs are:

Variable costs per unit:

Manufacturing cost per unit produced

Direct materials .............. $ 55

Direct manufacturing labour ......... 45

Manufacturing overhead ........... 120

Marketing cost per unit sold ......... 75

Fixed costs:

Manufacturing costs ...........$1,471,680

R&D ................. 981,120

Marketing ............... 3,124,480

REQUIRED

1. Calculate the operating income under variable costing.

2. Each router unit produced is allocated $165 in fixed manufacturing costs. If the production-volume variance is written off to cost of goods sold, and there are no price, rate, or efficiency variances, calculate the operating income under absorption costing.

3. Explain the differences in operating incomes obtained in requirement 1 and requirement 2.

4. Electron’s management is considering implementing a bonus for the supervisors based on gross margin under absorption costing. What incentives will this create for the supervisors? Do you think this new bonus plan is a good idea? Explain briefly.