A. The best way to calculate this is to recalculate the income statement based on having only one segment, since Segment B will be closed. Segment B’s sales and variable costs will be gone, but only $1,500 of Segment B’s fixed cost of goods sold will be eliminated after Segment B is closed. Since Segment B’s fixed cost of goods sold is $2,500, $1,000 of fixed costs will remain and be absorbed by Segment A. $1,500 of Segment B’s fixed selling and administrative expenses will also remain after Segment B is closed.
Total operating income including Segment B is $500. Without Segment B, total operating income will decrease to a loss of $1,500, which is a $2,000 decrease.
B. This answer results from eliminating fixed cost of goods sold in total. However, all of Segment A’s fixed cost of goods sold would remain, and a portion of B’s fixed cost of goods sold would remain.
C. This assumes the $500 loss for Segment B would disappear and have no impact on Segment A. However, the fixed costs would still remain in total for selling and administrative and in part for COGS.
D. This answer results from assuming that $1,500 of Fixed COGS would remain after Segment B is closed, rather than $1,000 ($2,500 - $1,500 of eliminated costs).
