Dirt-B-Gone Company manufacturers a professional-grade vacuum cleaner and began operations in 2014. For 2014, Dirt-B-Gone budgeted to produce and sell 23,000 units. The company had no price, spending, or efficiency variances and writes off production-volume variance to cost of goods sold. Actual data for 2014 are given as follows:

Units Produced 20,000

Units Sold 19,500

Selling Price $418

Variable Costs:

Manufacturing Cost per unit produced:

Direct Materials $32

Direct Manufacturing Labor $25

Manufacturing Overhead $52

Marketing cost per unit sold $40

Fixed Costs:

Manufacturing Costs $1,196,000

Administrative Costs $946,100

Marketing $1,479,000

Requirements:

1. Prepare a 2014 income statement for Dirt-B-Gone Company using variable costing.

2. Prepare a 2014 income statement for Dirt-B-Gone Company using absorption costing.

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

4. Dirt-B-Gone'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 Dirt-B-Gone management make to improve such a plan? Explain briefly.