Discussion
A plant covering its variable costs but not its full share of head office overhead should
Answer: B
Correct answer: continue, if the overhead continues whether or not it operates
Head office overhead that continues regardless is not avoidable by closing, so it is irrelevant to the decision. What matters is whether the plant covers its own variable costs and any fixed costs that closure would actually save. If it does, closing makes the firm worse off by the amount of the contribution lost, whatever the allocated overhead makes the plant’s accounts look like.
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