Exercises 18-46 (Algo) Profit Centers: Comparison of Variable and Full Costing (Underapplied Overhead) [LO 18-3, 18-4] Mark Hancock Incorporated manufactures a specialized surgical instrument called the HAN-20. The firm has grown rapidly in recent years because of the product's low price and high quality. However, sales have declined this year primarily due to increased competition and a decrease in the surgical procedures for which the HAN-20 is used. The firm is concerned about the decline in sales and has hired a consultant to analyze the firm's profitability. The consultant was provided the following information: Sales (units) Production Budgeted production and sales Beginning inventory Data per unit (all variable) Price Direct materials and labor Selling costs Fixed costs Manufacturing overhead Selling and administrative 2021 2022 3,400 3,000 4,000 2,520 4,200 3,600 1,000 1,600 $ 2,095 $ 1,995 1,200 125 1,200 125 $ 735,000 120,000 $ 630,000 120,000 Top management at Hancock explained to the consultant that a difficult business environment for the firm in 2021 and 2022 had caused the firm to reduce its price and production levels and reduce its fixed manufacturing costs in response to the decline in sales. Even with the price reduction, there was a decline in sales in both years. This led to an increase in inventory in 2021, which the firm was able to reduce in 2022 by further reducing the level of production. In both years, Hancock's actual production was less than the budgeted level so that the overhead rate for fixed overhead, calculated from budgeted production levels, was too low, and a production volume variance was calculated to adjust cost of goods sold for the underapplied fixed overhead (the calculation of the production volume variance is explained fully in Chapter 15 and reviewed briefly below).