Answer (C) is correct . In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred. Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales, especially when the UCM (selling price per unit – variable costs per unit) is constant. Unit sales times the UCM equals the total CM, and operating income (a pretax amount) equals the CM minus fixed costs of operations. If the UCM is constant and fixed costs are stable, the change in operating income will approximate the change in the CM (unit sales × UCM).
Answer (A) is incorrect because Unit sales multiplied by the sales price equals sales revenue, but this amount does not necessarily correlate with operating income. A change in unit variable costs may cause revenue and operating income to move in different directions.
Answer (B) is incorrect because Operating income is not necessarily correlated positively or negatively with finished goods inventory, however valued.
Answer (D) is incorrect because Operating income is not necessarily correlated positively or negatively with finished goods inventory, however valued.
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