Question

Somerset Corporation is composed of five divisions, and each division is allocated a share of Somerset...

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 $7,500,000 Variable operating costs 5,100,000 Traceable fixed operating costs 1,900,000 Allocated corporate overhead 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.

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Answer #1
The allocated overheads will always be incurred as they are not additional costs incurred but
only the allocated costs of already incurred overheads.
The contribution margin from metro division = $7500000 - $5100000
                       = $2400000
There is a saving of fixed oprating costs by closing down the Metro divison.
Therefore, the total impact of profitability on Somerset's overall profitability will be equal to,
= Contribution margin - Allocated overheads.
= $2400000 - $300000
= $2100000
Therefore, the overall profitability will decrease by $2100000.
Option C is the correct answer.
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