Creative Learning Centers (CLC), a for-profit firm, operates over 100 preschools
ID: 2519739 • Letter: C
Question
Creative Learning Centers (CLC), a for-profit firm, operates over 100 preschools primarily located in the northeast for children ages 4–6. CLC’s innovative curriculum utilizes the latest technology and offers young minds creative expression, language and social skills, physical movement, music, and number skills—all provided by professional trained teachers. CLC leases buildings for their schools and invests substantial resources in leasehold improvements for classrooms, technology, and playground equipment. CLC’s cost of capital is 12 percent. Typical tuition is about $6,300 per year for a Page 200 five-day-a-week, four-hour-per-day program. Maria Schnelling manages 15 CLC schools in the state of Virginia. She has decision-making responsibility for staffing and operating her schools, as well as the responsibility for recommending adding new schools and closing existing schools. The following tableprovides current operating data on all of her 15 preschools, and breaks out her top- and bottom-performing schools:
“After-tax operating income” represents all revenues less all expenses (including depreciation and taxes but excluding any interest on debt to finance the investment) of running a school for the last 12 months.
Ms. Schnelling has identified three possible locations for new CLC preschools in Virginia (denoted as NVA1, NVA2, and NVA3). The following table provides current projected data on the three new preschools:
Required:
A.) If Maria Schnelling is evaluated and rewarded based on after-tax operating income, which of her 15 existing schools will she recommend closing, and which of her three new schools will she recommend opening? (Justify your answers.)
B.) If Maria Schnelling is evaluated and rewarded based on return on investment, which of her existing 15 schools will she recommend closing, and which of her three new schools will she recommend opening? (Show computations.)
C.) You have been hired as a consultant to the board of directors to advise the board as to how CLC should measure and reward the performance of CLC managers, such as Ms. Schnelling in Virginia. How should CLC measure and reward its state managers? Provide a compelling rationale to support your recommendation. (Support your recommendation with relevant computations.)
After-Tax Total Operating IncomeInvestment $11,625.000 All 15 Virginia preschools $1,811,250 Best 3 Virginia performers VA4 VA12 VA9 Worst 3 Virginia performers VA2 VA8 VA5 $184,230 $156,030 $151,000 $801,000 $743,000 $755,000 S34,000 $14,200 $23,700 $680,000 $710,000 $790,000Explanation / Answer
A) If Ms.Maria is evaluating her schools on the basis of after-tax operating income, the school with lowest after tax operating income shall be selected for closing and the one with higest after tax operating income shall be selected for opening.
The table of best and worst performers given in the question shows that VA5 gives the lowest after tax operating income, that is, -$23,700 and hence, VA5 should be closed down.
The second table in the question shows that NVA1 has the highest after tax operating income of $132,000 and hence will be selected for opening.
B)If Ms.Maria is evaluating her schools on the basis of return on investment, first we will have to calculate the respective retirnson investments:
184230
Looking at the above table, it is clear that VA5 has the lowest and negative return on investment of -3% hence it shall be closed down.
Similarly,
From the above table, it can be seen that NVA1 has the highest return of 15% and hence it should be selected for opening.
C) according to me, the best way to measure the performance and reward the managers is to calculate the return on investment on totality basis of all the preschools assigned to that manager.
As per the data given in the question, the return on investment given by preschools managed by ms.maria is (1811250/11625000)*100=15.58%.
The remuneration to managers should comprise of both, fixed and variable components.
A certain fixed amount should be given to every manager based on number of schools and number of total students.
And a variable remuneration should be offered based on the return on investment provided by that manager.
School name after tax operating income $ total investment$ return on investment % VA4184230
801000 (184230/801000)*100=23% VA12 156030 743000 (156030/743000)*100=21% VA9 151000 755000 (151000/755000)*100=20% VA2 34000 680000 (34000/680000)*100=5% VA8 14200 710000 (14200/710000)*100=2% VA5 -23700 790000 (-23700/790000)*100=-3%Related Questions
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