Grunewald Company manufacturers a professional grade vacuum cleaner and began operations in 2011. For 2011, Grunewald budgeted to produce and sell 20,000 units. The company had no price, spending, or efficiency variances, and writes off production- volume variance to cost of goods sold. Actual data for 2011 are given as follows: Units produced 18,100 Units sold 17,750 Selling price $425 Variable costs: Manufacturing cost per unit produced Direct materials $30 Direct manufacturing labor 25 Manufacturing overhead 60 Marketing cost per unit sold 45 Fixed costs: Manufacturing costs $1,100,000 Administrative costs 965,450 Marketing 1,366,400

1. Prepare a 2011 income statement for Grunewald Company using variable costing.

2. Prepare a 2011 income statement for Grunewald Company using absorption costing.

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

4. Grunewald's management is considering implementing a bonus for the supervisors based on gross margin under absorption costing. What incentives will this create for the supervisors? What modifications could Grunewald management make to improve such a plan? Explain briefly.