Horace Company manufactures a professional-grade vacuum cleaner and began operations in 2017. For 2017, Horace budgeted to produce and sell 25,000 units. The company had no price, spending, or efficiency variances and writes off production-volume variance to cost of goods sold. Actual data for 2017 are given as follows:

Units produced ....................................21,000

Units sold ...........................................18,500

Selling price ........................................$ 432

Variable costs:

Manufacturing cost per unit produced:

Direct materials ....................................$ 33

Direct manufacturing labor ........................ 23

Manufacturing overhead ........................... 62

Marketing cost per unit sold ........................ 46

Fixed costs:

Manufacturing costs ................................$1,550,000

Administrative costs ................................ 906,300

Marketing costs ..................................... 1,479,000

Required

1. Prepare a 2017 income statement for Horace Company using variable costing.

2. Prepare a 2017 income statement for Horace Company using absorption costing.

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

4. Horace's management is considering implementing a bonus for its supervisors based on gross margin under absorption costing. What incentives will this bonus plan create for the supervisors? What modifications could Horace management make to improve such a plan? Explain briefly.