Horace Company manufacturers a professional dashgrade vacuum cleaner and began operations in 2014. For 2014, Horace budgeted to produce and sell 27,000 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 21,000

Units sold 18,500

Selling price $420

Variable costs:

Manufacturing cost per unit produced

Direct materials $31

Direct manufacturing labor 24

Manufacturing overhead 58

Marketing cost per unit sold 41

Fixed costs:

Manufacturing costs $1,566,000

Administrative costs 926,400

Marketing 1,282,800

1.	Prepare a 2014 income statement for Horace Company using variable costing.
2.	Prepare a 2014 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 the 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