Question

A departmental store is thinking of eliminating one of its departments because the accountant, using the total cost basis to profitability analysis, says the department is operating at a loss. What should be investigated before the final decision is made?

Answer 1

Answer:

Typically when a deficit proposal is created by the accounting department, a meeting with the board of directors occurs whereas the proposed is introduced, discussed and voted on.

Contribution to fixed cost by that department

If that department was closed:

Could the overhead be reduced ( or will the contribution be lost , and the overhead stay fixed)

Could it be replaced by something that would make more contribution ( expansion of another department , or a new range)

Total profitability includes a share of overhead. It’s a useful tool , but the method of sharing the overhead is often iffy. I always look at departmental contribution as well , so you get 2 views