Middle Hurst House Case Study

Middle Hurst House
Rita Fountain
BUS 630 Managerial Accounting
Frederick Seiler
November 10, 2014

TO: George Friedman and Bill Compton
FROM: Rita Fountain DATE: November 10, 2014 SUBJECT: Profitability of Expansion
Presently the Middle Hurst House daycare center/ preschool is using one instructor per classes and is incompliance with state regulations. Class sizes are determined by state law which sets a limit on the number of children per instructor. Mr. George Friedman wants to increase the quality of services by decreasing class sizes and also by expanding student enrollment. Mr. Compton major concern is maintain present profit margins.
By performing an incremental analysis based on Mr. Friedman’s survey
of present parent support for a tuition increase tied to a reduction in class sizes. The results of this survey yield interesting results. While not all parents were supportive, the majority of the parents were supportive of at least 25 % increase in tuition. My incremental analysis show that an increase in tuition would support a decrease in class size. There are some concerns. Overall, the analysis show that decrease in class size and increase in tuition cost will yield a profit of $ 355 per month. Mr. Friedman would like a student to instruct ration of 6:1 for the 2-3 age group. In order to attain this profit tuition for 2-3 age group would increase by 61 %, the new tuition would be $ 518 per month per student. Presently there are 20 students enrolled to decrease class size two new instructors will need to be hired. The hiring of two instructor will increase salary fixed cost by $ 3960 per month. Both the 3-4 age and 4-5 age groups classes would decrease to a ratio of 8 students to one instructor. The change will increase tuition by 47% and also require the hiring of two additional instructors. The new tuition will by $411 per student per month. The 5-6 age group classes will require the hiring of one additional instructor and increase tuition to $325 and increase of 25%. The increase in tuition will also allow for the increase in classes. Using the waitlist to fill class will yield an incremental profit of $ 1808 per month. To obtain this profit a total of 16 students will be enrolled and 7 instructors will be required. In addition to tuition increases previously reported. I also analyzed the profitability of Mr.
Friedman’s desire to begin offering quality infant care. This expansion will be profitable. It does not require an increase in food costs. Using ratio of 5 infants to one instructor will produces revenue in the amount of $2590 per month. Instructor salary, and benefits will cost $ 1960 per month. The variable supplies cost will be only $5 per month and yield $625 per month in profits. Overall my analysis shows that Friedman’s desire to increase the quality of service by decreasing class sizes and also by expanding student enrollment will be profitable. It also, maintains the profit margin expected by Mr. Compton. My concern is that the tuition increases are beyond what parents are supportive of. I recommend that an additional survey be performed, including the tuition changes I have provided. This will give a more accurate analyses of the number of parents who will support an
Increase of this size. However, I strongly recommend the expansion into quality infant care services. Cost are minimal in relationship to potential
profits.

APPENDIX

New Instructor Average % increase To student total Number of Incremental tuition over current
Age Ratio Children New Classes Costs Increase Tuition

2-3 6:1 20 2 $3960 198.00 61%
3-4 8:1 15 1 $1960 130.66 47%
4-5 8:1 15 1 $1960 130.66 47%
5-6 10:1 30 1 $1960 65.33 25%

1. Salaries (2 instructors x 1600) $3200

Staff benefits ($3200 x 10%) + (2 x$200) 760

Incremental costs $3960

2.
Salaries (1 instructor x 1600) $1600
Staff benefits ($1600 x10%) +(1 x$200) 360
Incremental Costs $1960

1b.
Incremental revenue ($260 x 10 students) $2600
Minus incremental cost: Instructor’s Salary $1600 Staff Benefits {(10%x $1600) + $200} 360 Food ($1.25 x10 students x22days) 275 Variable supplies ($1 x 10 students) 10 $2245
Incremental profit $ 355

1c.
Incremental revenue
Increased fees, old students:

2-3 age group ($198 x 20) 3960
3-4 age group ($130.66 x 15) 1960
4-5 age group ($130.66 x 15) 1960
5-6 age group ($ 65.33 x 30) 1960

New Students
2-3 age group ($518 x 4) 2072
3-4 age group ($ 411 x1) 411
4-5 age group ($ 411 x 1) 411
5-6age group ($325 x 10) 3250

Total incremental revenue $15984

Minus incremental Costs:

Instructors (7 new classes x $ 1600) 11200 Staff benefits {(10% x $11200) + $1400} 2520 Food ($1.25 x 16 students x 22days) 440 Variable supplies ($1 x 16 students) 16 Total incremental cost $14176
Incremental Profit $ 1808
This Alternative increase profits by $ 1808.00

1d.
New Infant
care:

Incremental revenue ($518 x 5 Students) $2590
Incremental costs: Instructor $1600 Staff benefits {(10% x $1600) + $200} 360 Variable Supplies ($1 x 5 students) 5 1965
Incremental Profits $ 625