Following are the operating results of the two segments of Parklin Corporation
|
Segment A |
Segment B |
Total |
||||
|
Sales |
$ |
10,000 |
$ |
15,000 |
$ |
25,000 |
|
Variable cost of goods sold |
4,000 |
8,500 |
12,500 |
|||
|
Fixed cost of goods sold |
1,500 |
2,500 |
4,000 |
|||
|
Gross margin |
4,500 |
4,000 |
8,500 |
|||
|
Variable selling and administrative |
2,000 |
3,000 |
5,000 |
|||
|
Fixed selling and administrative |
1,500 |
1,500 |
3,000 |
|||
|
Operating income (loss) |
$ |
1,000 |
$ |
(500) |
$ |
500 |
Fixed costs of goods sold are allocated to each segment based on the number of employees. Fixed selling and administrative expenses are allocated equally. If Segment B is eliminated, $1,500 of fixed costs of goods sold would be eliminated. Assuming Segment B is closed, the effect on operating income would be
- An increase of $500.
- An increase of $2,000.
- A decrease of $2,000.
- A decrease of $2,500.