The decision to continue or discontinue a segment of the business should focus on:
A) sales minus total variable expenses and total fixed expenses.
B) sales minus total variable expenses and avoidable fixed expenses of the segment.
C) sales minus total variable expenses and allocated fixed expenses of the business.
D)none of the above.

Question

Quizplus · Accepted Answer

The best approach is to subtract the segment's total variable expenses and avoidable fixed expenses from its sales to determine its contribution margin. If the contribution margin is positive, the segment should be continued, but if it's negative, the segment should be discontinued. This approach enables management to focus on the cost that can be avoided and gives a clearer picture of the segment's profitability. Option A includes all fixed expenses, which could lead to incorrect decisions. Option C includes all fixed expenses, which could be misleading since some of these expenses cannot be avoided regardless of whether the segment continues or not. Option D is incorrect because one of the other options must be the right approach.

The Decision to Continue or Discontinue a Segment of the Business