Mastrolia Manufacturing produces pacifiers. The company uses absorption costing for external reporting, but management prefers variable costing for evaluating the profitability of each model. Bonuses, which make up a significant portion of each manager€™s annual compensation, are based on attaining certain minimum gross margin percentages. Selected data regarding production and sales of the company€™s popular €œLittle Eric€ model follow:

Required:
1. Calculate Mastrolia€™s gross profit percentage each year under generally accepted accounting principles. Briefly explain the reasons for any variations in the annual gross profit percentage.
2. Calculate Mastrolia€™s gross profit percentage each year under variable costing. Briefly explain the reasons for any variations in the annual gross profit percentage.
3. If you were the manager of the €œLittle Eric€ plant and your annual bonus was based on the plant achieving a gross profit percentage in excess of 15% each year, which method would you prefer and why? (Assume you can significantly influence annual productionschedules.)

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2014 2015 2016 Selling price per unit Variable production costs per unit Fixed production costs per year Beginning inventory 1/1/2014 10.0010.00 10.00 $4.00 4.00 4.00 $500,000 $%500,000 $500,000 30,000 units@$8.00 (FIFO basis) Units produced Units sold Ending inventory (units) (variable cost $4.00) 125,000 100,000 55,000 100,000 85,000 70,000 115,000 140,000 45,000