Question

Beryl Enterprise is considering closing down its Jamaica location. This location presently has a contribution margin of $1,000,000. Overhead allocated to it is $2,500,000, of which $250,000 cannot be eliminated. If this location were to discontinue operations, by what amount would Beryl's pre-tax income increase?

A)

$250,000.

B)	$1,250,000.

C)	$1,500,000.

D)	$1,000,000.

Answer 1

Contribution margin = $1,000,000

Overhead allocated = $2,500,000

Unavoidable overheads = $250,000

Avoidable overheads = Overhead allocated - Unavoidable overheads

= 2,500,000-250,000

= $2,250,000

Savings in overheads	2,250,000
Loss of contribution margin	-1,000,000
Increase in pretax income	$1,250,000

If the Jamaica location is discontinued, pretax income will increase by $1,250,000

Correct option is B.

Kindly comment if you need further assistance.

Thanks‼!