I need help in this accounting course: CASE 9A – MIDDLEHURST HOUSE Middlehurst H
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I need help in this accounting course:
CASE 9A – MIDDLEHURST HOUSE Middlehurst House is a daycare center/preschool which operates as a partnership of George Friedman and Bill Compton. The center is in a city that has a large base of two income families who have a need for quality day care. The two men started the center this year. Compton contributed $40,000 to get the business started—to purchase equipment and to operate through the early months.
Friedman, who previously managed another center, is the director of the center and draws $2,000 per month for his services. Partnership profits and losses, after Friedman's salary, are split 75 percent for Compton and 25 percent for Friedman.
Middlehurst House operates from 6 a.m. to 6 p.m., Monday through Friday. It is in a single building that has a capacity limit of 120 children and meets city and state regulations. At present, the center has six classes, all at maximum sizes, structured as follows:
Number of classes
Children per class
Total children
Monthly tuition per child
2 to 3
2
10
20
$320
3 to 4
1
15
15
280
4 to 5
1
15
15
280
5 to 6
2
15
30
260
Class sizes are determined by state law which sets a limit on the number of children per instructor. The center uses one instructor per classroom.
Tuition is charged monthly. Minor adjustments are made on an individual basis. In October, the most recent month with data available, revenues were $21,500 ($22,600 less $1,100 adjustments). Monthly revenues should be rather stable since classes are full most of the time.
Expenses for October were:
Salaries for instructors $9,600
Salary of director 2,000
Salary of part-time cook 900
Food expenses 2,200
Staff benefits expenses 2,450
Supplies expenses 600
Occupancy and other administrative expenses 3,250
Total expenses $21,000
Fixed expenses are the salary of the part-time cook and occupancy and other administrative expenses. The salary of the director is fixed—as a partnership, this is in reality a distribution of profits, but it is included in expenses for comparative purposes.
Food is $1.25 per student per day. Staff benefits are 10 percent of salaries plus $200 per person for benefit programs for instructors and the part-time cook. Variable supplies are $1 per student per month. Step costs are salaries for instructors, averaging $1,600 per instructor per class.
Friedman wants to increase the quality of service by decreasing class sizes and also by expanding student enrollments. These alternatives are interrelated. Friedman thinks that class sizes are too large and that children are not getting the individual attention they require. Friedman surveyed parents of all 80 students to measure their support for a tuition increase tied to a reduction in class size. For children ages 2 to 5, most parents would support a 25 percent tuition increase, and nearly 50 percent would support a 50 percent increase. Of the 5-to-6 age group parents, nearly three fourths did not want any increase. The remainder said they would support a 25 percent increase but no more.
Proper class size is very subjective. However, Friedman feels that he could achieve a child/ instructor ratio of 6 to 1 for the 2-to-3 age group, an 8 to 1 ratio for the 3-to-4 and 4-to-5 age groups, and a 10 to 1 ratio for the 5-to-6 age group.
The center has easily maintained the 80-student level, with each class full. Friedman keeps in touch with waiting-list parents to make certain each is still interested. This list provides children when someone leaves the center. The current waiting list is as follows:
Age group
Number of children
Age group
Number of children
2 to 3
5
4 to 5
4
3 to 4
7
5 to 6
11
Friedman does not start a new class unless more students are on the waiting list than are required per class. Obviously, enough students are on the 5-to-6 age group waiting list to start a new class. Lately, however, he has wondered if the center could make a profit by starting classes with fewer than the requisite number, taking the chance that new students would appear and could be added immediately.
Information from his various inquiries implies that a potential market for quality infant care (0 to 24 months) exists. Friedman doesn't think this expansion would be profitable. However, he has never done an analysis of the situation and has not thought about an appropriate tuition. He believes that the infant/instructor ratio in his center should be no higher than 5 infants to one instructor. The center would have no food costs for the infants.
Compton will only agree to Friedman's suggested changes if the center will continue to operate at or above the current profit level.
Friedman does not start a new class unless more students are on the waiting list than are required per class. Obviously, enough students are on the 5-to-6 age group waiting list to start a new class. Lately, however, he has wondered if the center could make a profit by starting classes with fewer than the requisite number, taking the chance that new students would appear and could be added immediately.
Information from his various inquiries implies that a potential market for quality infant care (0 to 24 months) exists. Friedman doesn't think this expansion would be profitable. However, he has never done an analysis of the situation and has not thought about an appropriate tuition. He believes that the infant/instructor ratio in his center should be no higher than 5 infants to one instructor. The center would have no food costs for the infants.
Compton will only agree to Friedman's suggested changes if the center will continue to operate at or above the current profit level.
Questions:
1. Look at each decision separately, as incremental to the current situation, and evaluate the marginal profit:
a. If class size is decreased (keeping the same 80 students), what increase in tuition is necessary to keep the current monthly profit level?
b. Without regard to (a), is it profitable to create the new class from the waiting list? Explain.
c. Use the new fee structure as found in (a). Is it profitable to move to smaller class sizes, if new full classes are created and filled to their new maximums using the waiting list? Show calculations.
d. Is a class for infant care profitable if tuition is the same as the proposed class tuition for the 2-to-3 age group?
2. Write a brief memo to Friedman and Compton highlighting any concerns that underlie the analyses you have performed in Part 1
Number of classes
Children per class
Total children
Monthly tuition per child
2 to 3
2
10
20
$320
3 to 4
1
15
15
280
4 to 5
1
15
15
280
5 to 6
2
15
30
260
Explanation / Answer
Answer: 1
Answer:2
Memo to Partners
The analysis of different options analyzed in part 1 indicates that the business can be expanded in various dimensions .One possible options is to increase the fees on which a not all the categories but some parents are agreed. Another good options is to make the optimum use of the capacity that is 120 students which is analyzed in option b to increase the student numbers and give the chance to waiting list students but it is not favorable for all age groups and the overall results are also not favorable .the best option would be options C which is giving the higher net income and includes increasing the number of students and decreasing the class size and a slight increment in fess but here the impact of fess increment on student attendance should also be considered. However the option to open infant group is feasible and these segment of market should be explored.
Middlehurtst Case Answers for Question 1 Initial Workings Age Group 2 to 3 3 to 4 4 to 5 5 to 6 Number of Students per Class 10 15 15 15 Total Classes 2 1 1 2 Total students per age group 20 15 15 30 Fees Per child (in $) 320 280 280 260 Revenue Per Age group 6400 4200 4200 7800 Answer a Age Group 2 to 3 3 to 4 4 to 5 5 to 6 Total Proprosed child instrutor ratio 6 t0 1 8 t0 1 8 t0 1 10 t0 1 Insturctors required 4 1.875 1.875 3 incremental Cost Salaries 3,200 1,600 1,600 1,600 8,000 Salaries for director - - - - - Salaries of cook - - - - - Food Expense - - - - - Staff benefit Expense 720 360 360 360 1,800 Supplies Expense - - - - Occupancy and other administrative expense - - - - - Required Profit - - - - 500 Incremental Revenue Required 3,920 1,960 1,960 1,960 10,300 Increment in tution fee per student 196 131 131 65 N/A Percentage increase 0.61 0.47 0.47 0.25 0.48 Answer b Age Group 2 to 3 3 to 4 4 to 5 5 to 6 Total Current Waiting list 5 7 4 11 27 Incremental Revenue 1600 1960 1120 2860 7540 Incremental Cost Salaries -1600 -1600 -1600 -1600 -6400 Food expense -137.5 -192.5 -110 -302.5 -742.5 Staff benefit Expense -360 -360 -360 -360 -1440 Supplies Expense -5 -7 -4 -11 -27 Net benefit / ( loss) -502.5 -199.5 -954 586.5 -1069.5 Explanation for answer b 0 It is only benifical to start a new class for the age group of 5 to 6 as it is the only profitable option all other options are not feasible until required level of students are not available Answer c Age Group 2 to 3 3 to 4 4 to 5 5 to 6 Total New rates 516 411 411 325 Number of students per age group 20 15 15 30 Class size 6 8 8 10 Classes per age group 4 2 2 4 12 Number of stuent Per age group after reduction and using waiter to complete the classes 24 16 16 40 96 Incremental number of students 4 1 1 10 Incremental Revenue cause of increase in students 5,984 3,351 3,351 9,133 21,819 - Incremental Cost - - Salaries (3,200) (1,600) (1,600) (3,200) (9,600) - Food expense (110) (55) (55) (110) (330) - Staff benefit Expense (720) (360) (360) (720) (2,160) - Supplies Expense (4) (2) (2) (4) (12) - Net benefit / ( loss) 1,950 1,334 1,334 5,099 9,717 Answer d Infanct Care Class Expected number of students 5 Proposed Fee for 2 to 3 Expected Revenue 2,580 Expected Cost Salary cost (1,600) Benefit (360) Supplies (5) Net income 615 Income statement for the month of october Revenue 21500 Expenses Variable Cost Fixed Cost Salaries for instructor -9600 1600 per month per instructor 9600 Salaries for director -2000 0 -2000 Salaries of cook -900 0 -900 Food Expense -2200 1.25 per student per day 0 Staff benefit Expense -2450 0 -1400 Supplies Expense -600 1 per student per month other is fixed Occupancy and other administrative expense -3250 F Net income 500 Compton share 375 Fried man share 125Related Questions
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