"It's Close to a $40,000 Loser and We Ought to Devote

question 14

Essay

"It's close to a $40,000 loser and we ought to devote our efforts elsewhere," noted Karenne Whitmore, 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. $$\begin{array} { l r } \text { Revenues } & \$ 120,000 \\\text { Variable costs } & 45,000 \\\text { Traceable fixed costs } & 89,000 \\\text { Allocated corporate overhead } & 24,000\end{array}$$
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 Whitmore's 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?

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Definitions:

Shares Outstanding

The total number of shares of a company’s stock that are currently owned by all its shareholders.

Equity Firm

A company that invests in businesses, typically taking a sizable stake, with the goal of increasing value over time before eventually divesting.

Borrowing

This is the act of obtaining funds from a lender under the agreement to pay back the principal amount along with interest.

Repurchase

The act of buying back goods or securities that were previously sold, often referring to a company buying back its own shares.