Red and Green, Incorporated sells Christmas sweaters, ornaments, and gift-wrapping products. Information for the current year is presented below:

Christmas Sweaters, Ornaments, Gift Wrapping

Sales: $ 850,000 $ 150,000 $ 120,000

Costs Variable: 510,000 90,000 36,000

Fixed: 285,000 80,000 41,000

Total costs: 795,000 170,000 77,000

Operating income (loss): 55,000 (20,000) 43,000

Management is considering closing the Ornaments Department. With its closure, total fixed costs would decrease by $65,000, but the remainder would be shifted to other departments. In addition, remodeling costs of $22,000 would be needed in order to adjust the store to its new focus. Management expects that the Gift-Wrapping Department will increase sales by $100,000. However, the Christmas Sweaters Department would decline by 15% as customers generally purchase their sweaters when they are picking up an ornament for a Christmas party.

Required:

1. Describe and note whether the following costs are relevant to decisions:

a. Sunk costs

b. Opportunity costs

2. Should the Ornaments Department remain open, or should management close it?

a. Create a schedule similar to the one shown above only with the amounts if you closed the division.

b. Based on your schedule, indicate how much the company would save or lose by closing the department.

3. Why would a division stay open if earning an operating loss?