Mastrolia manufacturing produces pacifiers. The company uses absorption costing for external reporting, but management prefers variable costing (fixed cost considered as period costs instead of for each unit) for evaluating the profitability of each model. Bonuses, which make up a significant portion of each managers annual compensation, are based on attaining certain minimum gross margin percentages. Selected data regarding production and sales of the companys popular Little Eric model follow:

Selling price per unit	$10	$10	$10
Variable production costs per unit	$4	$4	$4
Fixed production costs per year	$500,000	$500,000	$500,000
Beginning inventory	30,000
LIFO inventory method	@ $8.00 each
Units Produced	125,000	100,000	115,000
Units Sold	100,000	85,000	140,000

Required:

1. Calculate Mastrolias 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 Mastrolias 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 the excess of 15% each year, which method would you prefer and why? (Assume you can significantly influence annual production schedules.)