Yes, It is possible to use Variable step solver when the Simulink model includes a MATLAB Function block.
However the MATLAB Function block doesn't know that it is dealing with a variable time step solver because it only operates on the data at the current time step and does not depend on the previous time step. In other words MATLAB Function block only operates on the data one time step at a time. So the onus is not on the function to know that it is dealing with intermediate time steps.
