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.