Dalton Company follows a policy of allocating all common costs equally among its profit centers....
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Accounting
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
$ 215,000
$ 85,000
$ 75,000
$ 55,000
Common fixed costs
$ 178,500
$ 59,500
$ 59,500
$ 59,500
Income from operations
$ 36,500
$ 25,500
$ 15,500
$ (4,500)
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 $39,000 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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Multiple Choice
Decrease by $20,500.
Increase by $16,000.
Increase by $4,500.
Decrease by $16,000.
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