Two department heads are engaging in an argument. The head of department A argues that department A makes a greater contribution to profits, having produced a higher operating income for three years. The business probably would be better off if department B were discontinued. In fact, department income statements from the last three years show department A had higher operating income than department B. Department B had an operating loss in two of the three years.

Write a memo addressing the following two issues:

1. What are the proper accounting measures to use to determine which department is making a greater contribution to the profits of the business?

2. What are the proper accounting measures to use to decide whether to discontinue one of the departments?