1.	Prepare a 20172017 income statement for Vacuum MagicVacuum Magic Company using variable costing.
2.	Prepare a 20172017 income statement for Vacuum MagicVacuum Magic Company using absorption costing.
3.	Explain the differences in operating incomes obtained in requirements 1 and 2.
4.	Vacuum MagicVacuum Magic's management is considering implementing a bonus for the supervisors based on gross margin under absorption costing. What incentives will this bonus plan create for the supervisors? What modifications could Vacuum MagicVacuum Magic management make to improve such a plan? Explain briefly

Units produced	25,000
Units sold	16,500
Selling price	$422
Variable costs:
Manufacturing cost per unit produced:
Direct materials	$31
Direct manufacturing labor	30
Manufacturing overhead	52
Marketing cost per unit sold	50
Fixed costs:
Manufacturing costs	$1,456,000
Administrative costs	1,004,500
Marketing costs	1,538,800

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Vacuum MagicVacuum Magic

Company manufacturers a

professionaldashgrade

vacuum cleaner and began operations in

2017.

For

2017,

Vacuum MagicVacuum Magic

budgeted to produce and sell

28,000

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:

.

(Click the icon to view the actual data fo

Requirement 1. Prepare a

2017

income statement for

Vacuum MagicVacuum Magic

Company using variable costing.

Complete the top half of the income statement first, then complete the bottom portion. (For amounts with a $0 balance, make sure to enter "0" in the appropriate cell.)

Variable Costing

	Operating income / (loss)

Requirement 2. Prepare a

20172017

income statement for

Vacuum MagicVacuum Magic

Company using absorption costing.

Complete the top half of the income statement first, then complete the bottom portion. (For amounts with a $0 balance, make sure to enter "0" in the appropriate cell. Label any variances as favorable (F) or unfavorable(U).)

Absorption Costing

	Operating income/(loss)

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

The difference in operating income under absorption costing and variable costing is $						. The 2017 operating income
under absorption costing is		than the operating income under variable costing because
						As a result, under
	costing, a portion of the			overhead remained in inventory and led to a
	cost of goods sold than under the other method.

Requirement 4.

Vacuum MagicVacuum Magic's

management is considering implementing a bonus for the supervisors based on gross margin under absorption costing. What incentives will this bonus plan create for the supervisors? What modifications could

Vacuum MagicVacuum Magic

management make to improve such a plan? Explain briefly.

What incentives will this bonus plan create for the supervisors?
What modifications could Vacuum Magic management make to improve such a plan?