Question

Required information [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: Responsibility margins Common fixed costs Income from operations Profit Profit Profit Dalton Co. Center 1 Center 2 Center 3 $176,000 $72,000 $62,000 $ 42,000 $ 143,400 $ 47,800 $ 47,800 $ 47,800 $ 32,600 $ 24,200 $14,200 $ (5,800) 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 $28,600 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:

Answer 1

Decrease in net operating income

= Margin lost - Avoidable fixed cost

= 42,000 - 28,600

= 13,400 Decrease

Option B is the answer