BUS 630 Week 4 Assignment
Week 5 Case
Case Info
Middlehurst House is a Childcare. Capacity limit – 120 kids
Case Info
October Revenue - $21,500
October Expenses –
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
Case Info
Other Expense Info –
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.
Case Info
Owner’s Objective - Friedman wants to increase the quality of service by decreasing class sizes and also by expanding student enrollments.
Tuition increase?
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.
Case Info
Objectives – Child/Instructor Ratio
6 to 1 for the 2-to-3 age group
8 to 1 ratio for the 3-to-4 and 4-to-5 age groups
10 to 1 ratio for the 5-to-6 age group
Case Info – Wait List
Case Questions 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?
Part A If class size is decreased (keeping the same 80 students), what increase in tuition is necessary to keep the current monthly profit level?
For Q1, since the center is operational, all of these decisions are based on incremental data. That is, we look for incremental revenues and costs. For Part A, you will calculate the Incremental Costs for each Age Group and then determine the Tuition Change Rate. Below is the example for the age Group 2-3 and you can follow the same logic and complete the calculations for the other three Age Groups.
Part A
Salaries (2 instructors x $1,600) $3,200
Staff benefits [($3,200 x 10%) + (2 x $200)] 720
Incremental costs $3,920
• $3,920/20=$196
• 196/$320=61.25%
Part B
Without regard to (a), is it profitable to create the new class from the waiting list? Explain.
Which group age will have a new class? Hint – the one has a large waiting list.
Incremental revenue ($260 x no. of students) $2,600
Minus incremental costs:
Instructor's salary given amount
Staff benefits [(10% x $salary) + $200] xx
Food ($1.25 x no. of students x 22 days) xx
Variable supplies ($1 x no. of students) xx 2,245
Incremental profit $355
What is your conclusion based on the number?
Part 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.
(c) Again, here you will do some incremental analysis. The check figures are provided.
Incremental revenue:
Increased fees, old students:
2-3 age group ($196*20) $3,920
3-4 age group
4-5 age group
5-6 age group
New students:
2-3 age group ($516*5) $2,580
3-4 age group
4-5 age group
5-6 age group
Total incremental revenue $16,455
Minus incremental costs:
Instructors (7 new class * $1,600) $11,200
Staff benefits
Food
Variable supplies
Total incremental costs (14,205)
Incremental profit $2,250
This alternative increases profits by $2,250.
Part C
Incremental revenue:
Increased fees, old students:
2-3 age group ($196 x 20) $3,920
3-4 age group ($130.67 x 15) 1,960
4-5 age group ($130.67 x 15) 1,960
5-6 age group ($ 65.33 x 30) 1,960
New students:
2-3 age group ($516 x 5 students) 2,580
3-4 age group ($410.67 x 1 student) 411
4-5 age group ($410.67 x 1 student) 411
5-6 age group ($325.33 x 10 students) 3,253
Total incremental revenue $16,455
Minus incremental costs:
Instructors (7 new classes x $1,600) $11,200
Staff benefits [(10% x $11,200) + $1,400] 2,520
Food ($1.25 x 17 students x 22 days) 468
Variable supplies ($1 x 17 students) 17
Total incremental costs (14,205)
Incremental profit $2,250
Part 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?
Incremental revenue
Incremental costs:
Instructor
Staff benefits
Variable supplies
Incremental profit $615
Hint – 5 new students, 1 instructor,