Final answer:
To determine whether the segment should continue operating or shut down, the net loss needs to be calculated by subtracting the total avoidable costs (fixed and variable) from the revenues earned. If the net loss is less than zero, it means the segment should continue in business. If the net loss is greater than zero, it would be advisable for the segment to shut down. In this case, since the net loss is less than zero, the segment should continue in business.
Step-by-step explanation:
The student's question pertains to a segment of a company that has reported a loss for the year. The question specifically mentions that all $196,000 of its variable costs are avoidable, and $99,000 of its fixed costs are avoidable.
To determine whether the segment should continue operating or shut down, we need to calculate the net loss. Net loss is calculated by subtracting the total avoidable costs (fixed and variable) from the revenues earned. If the net loss is less than zero, it means the segment should continue in business. If the net loss is greater than zero, it would be advisable for the segment to shut down.
In this case, since the center earns $20,000 in revenue and has avoidable fixed costs of $99,000 and avoidable variable costs of $196,000, we can calculate the net loss:
Net loss = revenues - (fixed costs + variable costs)
Net loss = $20,000 - ($99,000 + $196,000)
Net loss = -$275,000
Since the net loss is less than zero, the segment should continue in business.