Question
Dalton Company follows a policy of allocating all common costs equally among its profit centers. A partial responsibility income statement for a typical month is
Dalton Company 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 Company | Profit Center 1 | Profit Center 2 | Profit Center 3 | |
---|---|---|---|---|
Responsibility margins | $ 218,000 | $ 86,000 | $ 76,000 | $ 56,000 |
Common fixed costs | $ 181,200 | $ 60,400 | $ 60,400 | $ 60,400 |
Income from operations | $ 36,800 | $ 25,600 | $ 15,600 | $ (4,400) |
After evaluating these data, Dalton Company decides to close Profit Center 3. This action eliminates all revenue, variable costs, and fixed costs traceable to Center 3, but eliminates only $39,800 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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