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QUESTION
Management Accounting assignment
Case 1
Douglas and Pamela Frank are a married couple. They both worked for a railroad company for 30 years. At age 57, Douglas and age 52, Pamela retired and moved to the small town of Ovilla, TX, which has a population of approximately 3,500 residents. When the Franks moved to the town, they decided to start a child care business in their home called Nanna’s House.
Nanna’s House is licensed by the state. The state charges an annual fee of $225 to maintain the license. Insurance is required at a cost of $3,840 annually. The facility is licensed to care for a maximum of six children. The Franks charge a fee of $800 per month for each child. The monthly fee is based on a full day of care, from 8:00 a.m. to 4:00 p.m. If additional time is required beyond 4:00 p.m., parents must pay an additional charge of $15 per hour for each child. The couple provides two meals and a snack for the children. The cost of the meals and snack is $3.20 per child per day. There are six children currently enrolled.
The facility is very nice. It is an 820 square foot addition to their home that was built in 1964. The Franks purchased the home and completed the renovations for $79,500 and they believe the addition has a useful life of 25 years. The facility has a large open space for play, reading, and other activities. There is a section for sleeping which contains small cots. The facility is equipped with a small kitchen, two bathrooms and a small laundry area. The daycare increased the Franks’ utility cost by $50 each month.
During the first week of operations, the washer and dryer stopped working. Both appliances were old and had been used by the couple for many years. The old appliances cost a total of $440. While a laundry room was not initially a necessity, it became increasingly important for laundering the soiled clothes of the children, blankets, and sheets. A company nearby, Red Oak Laundry and Dry Cleaning, can launder clothing for the Franks, including pick-up and delivery, for $52 per month. Alternatively, the Franks can take clothes to the laundromat once a week, which is three miles away (one way). The applicable mileage rate is $0.56/mile. They can launder the clothes themselves at a cost of $8 per week. The self-service alternative does not include detergent or fabric sheets. The couple would need to purchase these items in order to use the laundromat. Purchasing laundry supplies in bulk from MegaMart would cost $35 every quarter. The final alternative is for the Franks to purchase a washer and dryer. The cost of the appliances is: washer $420 and dryer $380. The additional accessories for both appliances, needed for installation, cost $43.72. The store will deliver the appliances at a total cost of $35. The cost of installing the appliances is free. Both appliances are expected to last 8 years. According to the manufacturer the washer will increase energy costs by $120 per year. The dryer will increase energy costs by $145 per year.
The Franks need some assistance in decision making and evaluation. They have contacted Emily Smith, their accountant, to provide some advice.
Required: (If necessary, use straight line depreciation assuming 4.33 weeks per month, and 52 weeks per year)
- Based on the information provided, what information is relevant to the decision to purchase the appliances? What information is irrelevant to the decision to purchase the appliances? Why?
- What could it cost the couple to launder clothes? Show your detailed calculations for each alternative on an annual basis.
- As Emily Smith, prepare a letter to the Franks advising them on their laundry needs. Based on your analysis of the alternatives, what is your recommendation and why?
- The Franks have a wait list for their daycare. They can hire an employee for $9 per hour for 40 hours each week. With the additional employee, the Franks can accept three additional children. Should the Franks hire the additional employee? Show your detailed calculations on a monthly basis.
- The Franks home can accommodate a maximum of nine children. They can move the daycare from their home to rented space in town, which can accommodate up to 14 children. The space will cost $650 per month and the utilities will cost $125 per month. Additionally, insurance will now cost the Franks $5,000 per year. Per state regulations, each adult can supervise no more than three children. As Emily Smith, prepare a letter to the Franks advising them on their space options. Should they continue to operate the facility at home or should they rent space in town? How many children should they accept? How many employees will they need to hire? Show your detailed calculations for each scenario on a monthly basis.
| Subject | Business | Pages | 8 | Style | APA |
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Answer
Management Accounting
Question One
Relevant information refers to information which would materially influence the decision-making process for the company. Irrelevant information on the other hand, are information which would not very helpful to the company enhancing its profit motive. The following would be relevant for decision making of the company;
- The new appliance cost.
- Cost of delivering new appliance
- Cost for installing new appliance
- Rising cost of utilities
- Laundry services pick-up and delivery cost
- The cost of self-service laundering and detergent as well as mileage.
These pieces of information will help Frank in planning and budgeting for the operations of the business. Irrelevant in information on the other hand would include;
- Old appliances cost
- Cost of detergent in case of exclusion in deliver and pick-up.
Question Two
Option 1
Having a fixed cost of $52
Option 2
The Cost of Mileage = $0.56
Per Mile, taking into account 3 Miles at two ways = $0.56*3*2 = $3.36 per week
Therefore, mileage Cost per month = $3.36*4.33 = $14.54
Cost of Laundering = $8 per week
Hence, Per month = $8 * 4.33 = $34.64
Laundry Supplies cost = $35 per Quarter
Therefore, $11.66 per Month ($35/3)
Hence, Total Cost of option 2 = $14.54+$34.64+$11.66 = $60.84.
Per Year = $ 60.84 x 12
= $ 730.1
Option 3
A decision to purchase to purchase appliances will not have an impact on the cost. In the event that this is preferred the cost will be as follows;
Incremental Cost = Washer Energy Cost = $120
Dryer Energy Cost = $145
Depreciation on new Appliance = $420+$380+$43.72+$35 = $878.72/8 = $109.85
Incremental Monthly Cost = 374.85/12 = $31.2375 x 12 = $374.85
Laundry Supplies = $11.66
Total Cost of Option 3 = 31.2375+11.66 = $42.90 per month.
On annual basis, this will be as follows;
$ 42.90 x 12 = $514.8
It is however, worth to note that the instantaneous outflow which will be as follows;
Cost of new Appliance $878.72 - Cost of Old Appliance = $440
= $438.72
Based on this analysis, I am recommending that option 2 be preferred the cheapest cost of production.
This can be settled immediately though with zero incremental benefit. However, the decision reduces the overall cost of laundering.
Based on this, a loss or profit from this project can be computed as follows;
Revenue from Daycare = $800 * 6 = 4800
Less: Expenses
License Fees (225/12) an assumption is made that it is annual basis (18.75)
Insurance (3480/12) (290)
Depreciation (79500/25/12) (265)
Utility cost (50)
Dry Cleaning (50)
Profit / (Loss) 4126
Question Three
Letter to Frank
Dear Frank
Based on the analysis done, I have obtained an evidence that the venture is viable and profitable. The business has an option of trading at a fixed cost of $52 as the first option. The second option will entail taking into consideration the mileage and laundry costs. In this second option, the business will incur a total cost of $ 730.1 per year. In option 3, the company will have an incremental cost of $ 120. In this third option therefore, the appliances cost to be incurred will be $438.72 per year. Based on this I would recommend that option 2 be considered. This is due to the fact that it is the cheapest amongst the three alternatives. The following additional considerations should also be actioned;
Hiring of More Employees
The activities of the business are bound to increase if any of the options are to be settled on. A consideration of hiring more employees should therefore be considered to ensure that a high level of efficiency is maintained when the project is actualized. It is however, worth to note that hiring of more employees will come with cost implications. Therefore, a strategy should be put in place to ensure that the value of the invested amount in employees is realized through their service delivery.
Getting More Space
With increase in the level of operations, more space will be needed for production. Renting of more space can be through hiring, or through construction. Since the business will be at its early phases, hiring is the most viable. Just like hiring of employees, getting more space will also come with cost implications. Therefore, proper calculations will have to be carried out, in order to establish a means through which space can be optimally utilized to minimize costs and maximize profit.
Yours Faithfully
Emily Smith
Question Four
The cost of hiring additional employees is as follows;
The Incremental cost = Salary to an employee = $9 per hour @ 40 Hours per.
Therefore, in one week * 4.33 = $1558.8
cost of Snacks = 3 Extra childs * 3.20 per day * 30 days per month = $288
Incremental Revenue = $800 * 3 = $2400
Incremental inflow = $2400 - $1558.8 = $841.20 per month
Only one employee can be accommodated so as to minimize costs. For children, only 3 can be accommodated.
More staff should be hired, as their hiring would make the company to earn more profit.
Question Five
As had been stated earlier, more space is likely to be needed for the business to operate without any hurdles whatsoever. The cost implication for renting more space will be as follows;
Incremental Cost = Cost of place = $650
Utilities = $125
Insurance = $1160
Snacks = $3.2 * 5 children (14-9) *30 = $480
Incremental Revenue = $800 * 5 = $4000
incremental Inflow = $4000 - $2415 = $1585 per month
As is shown above, the business will be able to accept only 5 children. This is the number that will enable business to operate within its means. These additional children will require an additional 2 workers only. Assuming that the two workers are paid $ 650, the business will incur $ 1350 per month. Leaving it with an incremental revenue of $ 2,650 i.e. $ 4,000- $ 1,350=$ 2,650.
More space should be rented as the business will realize more profit out of the decision. Failing to rent more space will deprive the business this projected profit.