Reference no: EM132474317

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:

                                                         Dalton Co.                           Profit Center 1              Profit Center 2              Profit Center 3

Responsibility margins                 $194,000                     $78,000                             $68,000                      $48,000

Common fixed costs                  $159,600                       $53,200                            $53,200                         $53,200

Income from operations             $34,400                         $24,800                             $14,800                        $(5,200)

Question 1: 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 $33,400 in common fixed costs. Closing Profit Center 3 has no effect upon the responsibility margins of Centers 1 and 2.

Question 2: Closing Profit Center 3 should cause Dalton's monthly operating income to:

Multiple Choice

Decrease by $19,800.
Increase by $14,600.
Decrease by $14,600.
Increase by $5,200.