Question
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
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 | $ | 203,000 | $ | 81,000 | $ | 71,000 | $ | 51,000 | ||||
Common fixed costs | $ | 167,700 | $ | 55,900 | $ | 55,900 | $ | 55,900 | ||||
Income from operations | $ | 35,300 | $ | 25,100 | $ | 15,100 | $ | (4,900 | ) | |||
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 $35,800 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:
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