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: 2021 4,000 4,360 4, 800 800 2022 3, 600 3, 120 4, 200 1, 160 Sales (units) Production Budgeted production and sales Beginning inventory Data per unit (a11 variable) Price Direct materials and labor Selling costs Fixed costs Manufacturing overhead Selling and administrative $ 2,095 1, 200 125 $ 1,995 1,200 125 $ 840,000 120,000 $ 735,000 120,000 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 ($840,000/4,800 budgeted units). Because the actual production level was 440 units short of the budgeted level in 2021 (4,800 4,360), the amount of the production volume variance in 2021 was 440 * $175 = $77,000. 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: 8,380,000 $ 1,100,000 5, 995,000 $ 7,095, 000 1,595, 000 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 $ 5,500,000 77,000 $ 5,577,000 $ 2, 803,000 $ 500,000 120,000 620,000 $ 2, 183,000 Required: 1. Using the full costing method, prepare the income statement for 2022. 2-a. Using variable 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 variable-costing methods. Req 1 Reg 2A Req 2B Using the full costing method, prepare the income statement for 2022. MARK HANCOCK, INCORPORATED Full Costing Income Statement 2022 Cost of goods sold Cost of goods available for sale Cost of goods sold Adjusted cost of goods sold Gross margin Less: Selling and administrative costs Operating income Using variable costing, prepare an income statement for each period. MARK HANCOCK, INCORPORATED Variable Costing Income Statement 2021 2022 Cost of goods sold Cost of goods available for sale Cost of goods sold Contribution margin Less: Selling and administrative costs Operating income Reg 1 Reg 2A Reg 2B Prepare a reconciliation of the difference each year in the operating income resulting from the full- and variable-costing methods. (Negative amounts should be indicated by a minus sign.) MARK HANCOCK, INCORPORATED Reconciling Difference in Net Income Between Absoprtion and Variable Costing 2021 2022 Change in inventory in units Multiply times fixed overhead rate Difference in net income