"It's close to a $40,000 loser and we ought to devote our efforts elsewhere," noted Cindy Mires, after reviewing financial reports of her company's attempt to offer a reduced-price daycare service to employees. The daycare's financial figures for the year just ended follow.Revenues$120,000Variable costs45,000Traceable fixed costs89,000Allocated corporate overhead24,000If the daycare service/center is closed, 70% of the traceable fixed cost will be avoided. In addition, the company will incur one-time closure costs of $6,800.Required: A. Show calculations that support Mires' belief that the daycare center lost almost $40,000.B. Should the center be closed? Show calculations to support your answer.C. What problem might the company experience if the center is closed?
What will be an ideal response?
A.
| Revenues | ? | $120,000 |
| Less: Variable costs | $45,000 | ? |
| Traceable fixed costs | 89,000 | ? |
| Allocated corporate overhead | 24,000 | 158,000 |
| Operating income (loss) | ? | $(38,000) |
B. The company would be better-off to continue the daycare service, as the cost of closure exceeds the benefit of on-going operation:
| Contribution margin lost ($120,000 - 45,000) | $(75,000) |
| Savings in traceable fixed costs ($89,000 × 70%) | 62,300 |
| One-time closure cost | (6,800) |
| Benefit (cost) of closure | $(19,500) |
Business
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