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Dalton Co.follows a policy of allocating all common costs equally among its profit centers.A partial responsibility income statement for a typical month is shown below:
After evaluating these data,Dalton Co.decides to close Profit Center 3.This action eliminates all revenue,variable costs,and fixed costs traceable to Center 3,but eliminates only $35,000 in common fixed costs.Closing Profit Center 3 has no effect upon the responsibility margins of Centers 1 and 2.
-Closing Profit Center 3 should cause Dalton's monthly operating income to:
A)Increase by $5,000.
B)Decrease by $15,000.
C)Decrease by $7,000.
D)Decrease by $20,000.

Question

[The following information applies to the questions displayed below.]
Dalton Co.follows a policy of allocating all common costs equally among its profit centers.A partial responsibility income statement for a typical month is shown below:
  After evaluating these data,Dalton Co.decides to close Profit Center 3.This action eliminates all revenue,variable costs,and fixed costs traceable to Center 3,but eliminates only $35,000 in common fixed costs.Closing Profit Center 3 has no effect upon the responsibility margins of Centers 1 and 2.
-Closing Profit Center 3 should cause Dalton's monthly operating income to:
A)Increase by $5,000. 
B)Decrease by $15,000. 
C)Decrease by $7,000. 
D)Decrease by $20,000.

Quizplus · Accepted Answer

Closing Profit Center 3 would eliminate its contribution margin but save its avoidable fixed costs. If the contribution margin is greater than the avoidable fixed costs, overall operating income would decrease by the difference, leading to the selection of option B.

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