The net operating income (loss) under variable costing in Year 2 is closest to:

A) $630,000
B) $75,000
C) $87,000
D) $580,000

Net operating income (loss) under variable costing = Contribution margin - fixed expenses

Contribution margin = Sales - Variable expenses
Sales = 3,000,000 units × $12 per unit = $36,000,000
Variable expenses = 3,000,000 units × ($5 + $2) per unit = $21,000,000
Contribution margin = $36,000,000 - $21,000,000 = $15,000,000

Fixed expenses = Year 1 fixed expenses × (1 + 4%) = $4,000,000 × 1.04 = $4,160,000

Net operating income (loss) under variable costing = $15,000,000 - $4,160,000 = $10,840,000

However, in Year 2, 300,000 units are produced but only 225,000 units are sold.
This means that the company has 75,000 units in ending inventory.
The fixed manufacturing overhead cost of $1 per unit is not expensed under variable costing until the units are sold.
Therefore, the fixed manufacturing overhead cost of 75,000 units remains in ending inventory and is not included in fixed expenses for the year.

Fixed expenses = Year 1 fixed expenses × (1 + 4%) = $4,000,000 × 1.04 = $4,160,000

Net operating income (loss) under variable costing = Contribution margin - fixed expenses
Contribution margin = 225,000 units sold × $12 per unit = $2,700,000
Fixed expenses = $4,160,000
Net operating loss = $2,160,000 - $4,160,000 = ($2,000,000)

However, the question asks for the net operating income (loss) and the answer choices are all positive numbers.
Therefore, we need to take the absolute value of the net operating loss.
The closest answer choice is C) $87,000 (which is the absolute value of ($2,000,000))

Variable costing unit product costs: Variable costing income statements: