Yes it isn't strictly incorrect though the problem with accepting it is that it encourages people to use it, which is a bad habit to get into since it is a sign of poor Welsh, so you're better off getting into the habit of using "hi'n". EDIT: Also you will have been maked wrong for not softly mutating "Gwlyb" after "yn".

There are some contractions which you should use, and this is one of them - when yn is being used as a link from dw i, etc, either to a verb-noun or, as here, to an adjective or noun.

You should not use a contraction with yn when it being used as a preposition meaning 'in/at'.