Question

"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 $120,000 Variable costs 45,000 Traceable fixed costs 89,000 Allocated corporate overhead 24,000 If 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?

Please show all calculations.

Answer 1

Part A	Income Statement
	Revenues	$                              120,000
Less:	Variable Costs	$                                45,000
	Contribution Margin	$                                75,000
Less:	Traceable Fixed Costs	$                                89,000
	Segment Margin	$                               -14,000
Less:	Allocated Corporate Overhead	$                                24,000
	Net Income	$                               -38,000
	As it can be seen that the Net Income is ($38,000), So it means that Daycare centre has lost $38,000
Part B	Savings/Increemental Cost if Daycare centre is closed
	Avoidable Traceable Fixed Cost($89,000*70%)	$                                62,300
	Less:Contribution Margin Foregone	$                                75,000
	Incremental Cost if Daycare Centre is closed	$                               -12,700
	Since there is a Incremental Cost of $12,700 in closing the Daycare Centre hence the same should not be closed.
Part C	If the centre is closed then it has to foregone a contribution margin of $75,000 which might affect it's overall Profit.