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 $500 per year.

Required

1. Prepare an income statement for each year using full costing.

2. Prepare an income statement for each year using variable costing.

3. Prepare a reconciliation and explanation of the difference each year in the operating income resulting from the full- and variable-costing methods.