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 "Little Eric" model follow: Table Summary: Rows 5 and 6 contain no data in columns 3 and 4. 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 "Little 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 production schedules.) C10-4 Baines Corporation: Using absorption versus variable costing This spreadsheet consists of: 1) Template for requirement 1 (beginning line 9 ) 2) Template for requirement 2 (beginning line 25) Requirement 1: 20X2 Pre-tax Profit Sales revenue Cost of goods sold: Variable production costs Fixed production costs: From 201 ending inventory From 20X2 production sold in 202 Operating profit Interest expense Pre tax-profit Had Baines Corporation been using variable costing as the computation base, the comparative income figures for 2013 and 2014 would have been: Requirement 2: Pre-tax Profit Sales revenue Cost of goods sold: Variable production costs Fixed production costs (period expense): Operating profit Interest expense Pre tax profit