Answer:
the income statement using the variable costing method would be:
2016 2017
Sales revenue $920,000 $1,840,000
Variable costs:
Contribution margin $450,000 $900,000
Fixed costs:
Operating income ($90,000) $360,000
the differences are:
Under absorption costing, the ending inventory carries $100,000 of fixed overhead, so the 2016 operating income = ($90,000) + $100,000 = $10,000. While the 2017 operating income = $360,000 - $100,000 = $260,000.
The problem with variable costing method is that it underestimates the value of ending inventory. In this case, ending inventory will be worth only $210,000 (direct materials + direct labor + variable overhead) instead of $310,000 (including allocation of fixed costs incurred during 2016).