Management decisions involving the elimination of a department should be based on the contribution margin of the department.

Question

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The contribution margin is the amount of revenue that exceeds the variable costs associated with producing a product or service. By reviewing the contribution margin of a department, management can assess whether the department is generating enough revenue to cover its variable costs and contribute to overall profitability. Therefore, decisions to eliminate a department should be based on this profitability analysis to ensure that the company is not reducing its overall profitability by eliminating a department with a positive contribution margin.

Management Decisions Involving the Elimination of a Department Should Be