Security Technology Inc. (STI) is a manufacturer of an electronic control system used in the manufacture of certain special-duty auto transmissions used primarily for police and military applications. The part sells for $55 per unit and had sales of 24,000 units in the current

year, 2015. STI has no inventory on hand at the beginning of 2015 and is projecting sales of 26,000 units in 2016. STI is planning the same production level for 2016 as in 2015, 25,000 units. The variable manufacturing costs for STI are $16 and the variable selling costs are only $.50 per unit. The fixed manufacturing costs are $200,000 per year and the fixed selling costs are only $500 per year.

Required

Prepare the following:

1. An income statement for 2015 and 2016 using full costing.

2. An income statement for 2015 and 2016 using variable costing.

3. A reconciliation and explanation of the difference in the operating income resulting from the full and variable costing methods.