Final answer:
Operating income using variable costing will be $1,020 lower than operating income if using absorption costing because all fixed costs are expensed under variable costing, while under absorption costing, some fixed costs are deferred in inventory.
Step-by-step explanation:
The question is how the operating income using variable costing compares to the operating income if using absorption costing. To determine this, we need to understand how fixed manufacturing costs are treated under both costing methods. With variable costing, only variable manufacturing costs are included in the cost of goods sold, and fixed manufacturing costs are treated as period costs and expensed in full in the period they are incurred. In contrast, absorption costing includes both variable and fixed manufacturing costs in the cost of goods sold. The fixed manufacturing cost rate is calculated based on the budgeted denominator level of 1,600 units, which gives us a per-unit fixed cost of $4,800 / 1,600 = $3 per unit. With 770 units produced and 630 units sold, there are 770 - 630 = 140 units still in inventory at the end of the year. Under absorption costing, the fixed costs allocated to these unsold units would remain in inventory and not yet expensed.
However, because the company uses variable costing, all $4,800 of fixed costs are expensed in 2017, irrespective of the number of units sold. Under absorption costing, only the fixed costs allocated to the sold units (630 x $3 = $1,890) would be expensed, with the remainder ($4,800 - $1,890 = $2,910) deferred in inventory. Thus, operating income using variable costing will be $2,910 - $1,890 = $1,020 lower than operating income if using absorption costing. None of the provided options (A, B, C, D) are correct.