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.

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.

Questions:

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? (two to three sentences)

Revenues Variable costs Traceable fixed costs Allocated corporate overheads $120,000 45,000 89,000 24,000