Somerset Corporation is composed of five divisions, and each division is allocat

Question

Somerset Corporation is composed of five divisions, and each division is allocated a share of Somerset overhead to make divisional managers aware of the cost of running the corporate headquarters. The following information relates to the Metro Division: Sales Variable operating costs Traceable fixed operating costs Allocated corporate overhead $7,500,000 5,100,000 1,900,000 300,000 If the Metro Division is closed, 100% of the traceable fixed operating costs can be eliminated. What will be the impact on Somerset's overall profitability if the Metro Division is closed? A. Decrease by $200,000. B. Decrease by $500,000. C. Decrease by $2,100,000. D. Decrease by $2,400,000.

Explanation / Answer

B. Decrease by $500,000

Somerset's overall profitability will Decrease by $500,000 if the Metro Division is closed:

= $7,500,000 - $5,100,000 - $1,900,000

= $500,000

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