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 primarlly 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:

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 varlance was calculated to adjust cost of goods sold for the underapplied fixed overhead $($the calculation of the

production volume varlance is explained fully in Chapter $15$ and reviewed brlefly below$).$

The production volume varlance for $2021$ was determined from the fixed overhead rate of $$175$ per unit budgeted

units$).$ Because the actual production level was $760$ units short of the budgeted level in $2021(7,400-6,640),$ the amount of the

production volume varlance in $2021$ was $760$$$175=$$$133,000.$ The production volume varlance is underapplied because the actual

production level is less than budgeted, and the production volume varlance 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:

Required:

Using the full costing method, prepare the income statement for $2022$

$2-$a$.$ Using varlable costing, prepare an Income statement for each period.

$2-$b$.$ Prepare a reconciliation of the difference each year in the operating income resulting from the full$-$ and varlable$-$costing methods.