I can see where she is coming from as well. It may have softened the blow if you had brought it up with new contracts before she brought it up.

At the end of the day, she's been managing the 1200 for this long, she should be able to continue to manage it.

And if you're area has changed, where there are more kids then spots to fill, then stick with it. You can replace her for the same or more with 2 full time children.

Maybe send her a detailed outline to make her feel better about the cost. If she's one of those people that only cares about cost, maybe best she moves on.