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)$1,000,000.
C)$1,500,000.
D)$1,250,000.

Question

Quizplus · Accepted Answer

If the Jamaica location is closed down, Beryl Enterprise would not have to bear the overhead cost allocated to it, which amounts to $2,250,000 ($2,500,000 - $250,000). The contribution margin would no longer be applicable. So, Beryl's pre-tax income would increase by $1,250,000 ($2,250,000 - $1,000,000). Therefore, the correct choice is D.

Beryl Enterprise Is Considering Closing Down Its Jamaica Location