Locus administration allocates its costs of 1 million to the

Locus administration allocates its costs of $1 million to the two operating divisions (A and B) of the company. These costs are not avoidable if one division is dropped. With an equal allocation of these costs to both divisions, Division A has a profit of $300,000 and Division B has a loss of $100,000.

What is the profit effect of the company if Division B is dropped and all other division costs are avoidable?

Solution

Gains:

Costs Avoided

($500,000 is not avoidable as mentioned)

so if Division B is dropped, then company\'s net income or profit will be decreased by 400,000$.