Calgary Corporation is closing one of its divisions. Operating data on this division follows: Sales $80,000
Variable costs 40,000
Overhead 40,000
Overhead consists of $30,000 in salary and $10,000 for rent and insurance. The salary is for the chief engineer, who will continue to work for Calgary even if the division is closed.
Assuming all overhead costs continue to be incurred even if the division closes, what will be the effect on overall company profits of closing the division?
A)$10,000 decrease
B)$40,000 decrease
C)$40,000 increase
D)$30,000 decrease

Question

Quizplus · Accepted Answer

If the division is closed, the variable costs of $40,000 will be eliminated but the fixed overhead costs of $40,000 will still be incurred. Therefore, there will be a decrease in overall company profits by $40,000. The salary of the chief engineer is not a relevant cost in this decision as it will be incurred regardless of whether the division is closed or not.

Calgary Corporation Is Closing One of Its Divisions