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# 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.

 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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