Collage Ltd is closing one of its divisions. Operating data on this division follows:
$\begin{array} { l l }
\text { Sales } & \$ 120,000 \
\text { Variable costs } & 46,000 \
\text { Overhead } & 60,000
\end{array}$
Overhead consists of $50,000 in salary and $10,000 for rent and insurance. The salary is for the production manager, who will continue to work for Collage 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) $60,000 decrease
B) $74,000 decrease
C) $74,000 increase
D) $46,000 increase

Question

Collage Ltd is closing one of its divisions. Operating data on this division follows:
 $\begin{array} { l l } 
\text { Sales } & \$ 120,000 \
\text { Variable costs } & 46,000 \
\text { Overhead } & 60,000
\end{array}$ 
Overhead consists of $50,000 in salary and $10,000 for rent and insurance. The salary is for the production manager, who will continue to work for Collage 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) $60,000 decrease
B) $74,000 decrease
C) $74,000 increase
D) $46,000 increase

Quizplus · Accepted Answer

Closing the division will eliminate its sales and variable costs, but the overhead costs will continue since the salary of the production manager will still be paid, and rent and insurance are fixed costs. The division's contribution margin (Sales - Variable Costs) is $74,000 ($120,000 - $46,000). Since this amount will no longer contribute to covering the fixed costs and the overhead costs continue, closing the division will decrease overall company profits by $74,000.

Collage Ltd Is Closing One of Its Divisions Sales $120,000 Variable costs 46,000 Overhead 60,000\begin{array} { l l } \text { Sales } & \$ 120,000 \\\text { Variable costs } & 46,000 \\\text { Overhead } & 60,000\end{array} Sales Variable costs Overhead ​$120,00046,00060,000​

Collage Ltd Is Closing One of Its Divisions $\begin{array} { l l } \text { Sales } & \$ 120,000 \\\text { Variable costs } & 46,000 \\\text { Overhead } & 60,000\end{array}$