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 2021 2022 5,200 5,320 4,800 4,320 6,000 800 5,400 920 $ 2,095 1,200 125 $ 1,995 1,200 125 $ 1,050,000 120,000 Manufacturing overhead Selling and administrative $ 945,000 120,000 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). The production volume variance for 2021 was determined from the fixed overhead rate of $175 per unit ($1,050,000/6,000 budgeted units). Because the actual production level was 680 units short of the budgeted level in 2021 (6,000 - 5,320), the amount of the production volume variance in 2021 was 680 x $175 = $119,000. The production volume variance is underapplied because the actual production level is less than budgeted, and the production volume variance is therefore added back to cost of goods sold to determine the amount of cost of goods sold in the full costing income statement. The full costng income statement for 2021 is shown below: Sales Cost of goods sold: Beginning inventory Cost of goods produced Cost of goods available for sale Less ending inventory Cost of goods sold: Plus unfavorable production volume variance Adjusted cost of goods sold Gross margin Less selling and administrative costs Variable Fixed Operating income 10,894,000 $ 1,100,000 7,315,000 $ 8,415,000 1,265,000 $ 650,000 120,000 $ 7,150,000 119,000 $ 7,269,000 $ 3,625,000 770,000 $ 2,855,000