Reference no: EM133037293
Question - Peter is a managing partner at a private equity firm, ABC. Among other fringe benefits, the firm offers a reduced-price daycare service to its employees. Peter is reviewing the segmental financials for his firm and is worried about the numbers reported by the daycare. "The daycare is a horrible loss-making proposition for us! It's losing close to $40,000 each year. We'd better cut our losses before its too late and shut this loser down!", says Peter. 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 overheads 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 Peter's belief that the daycare was losing close to $40,000 per year.
B. Should the daycare be shut down? Show calculations to support your answer.
C. What potential problems might the company experience if the center is closed?
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