Case 9A (Middlehurst House) –

| July 19, 2016

Paper , Order, or Assignment Requirements

In this case, management is presented with several decision options. For this assignment, you are required to provide a two to three single-spaced written memo evaluating options and providing recommendations. The written memo should be properly formatted according to APA guidelines and demonstrate research and critical thinking skills. Evaluations and recommendations should be supported by at least four scholarly sources.

In Question 1, evaluate each decision separately in full detail including calculations, as necessary. The evaluation should be included as part of the memo discussion, not a separate component. Evaluations can be included as appendices, exhibits or figures; however must be properly referenced within the written content.

In Question 2, prepare a comprehensive business memo addressing each decision and your recommendation. The memo should be properly formatted as a business memo and formatted according to APA guidelines.

Case Below

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 2000

Salary of part-time cook 900

Food Expenses 2,200

Staff benefits expenses 2,450

Supplies expenses 600

Occupancy and other admin 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

2 to 3 5

3 to 4 7

4 to 5 4

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:
  2. If class size is decreased (keeping the same 80 students), what increase in tuition is necessary to keep the current monthly profit level?
  3. Without regard to (a), is it profitable to create the new class from the waiting list? Explain.
  4. 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.
  5. Is a class for infant care profitable if tuition is the same as the proposed class tuition for the 2-to-3 age group?
  6. Write a brief memo to Friedman and Compton highlighting any concerns that underlie the analyses you have performed in Part 1. **Example of desired memo is below, can also be found at the following website: https://owl.english.purdue.edu/owl/resource/590/04/

 

Sample Memo

Summary:

This handout will help you solve your memo-writing problems by discussing what a memo is, describing the parts of memos, and providing examples and explanations that will make your memos more effective.

SUBJECT: Fall Clothes Line Promotion

Market research and analysis show that the proposed advertising media for the new fall lines need to be reprioritized and changed. Findings from focus groups and surveys have made it apparent that we need to update our advertising efforts to align them with the styles and trends of young adults today. No longer are young adults interested in sitcoms as they watch reality televisions shows. Also, it is has become increasingly important to use the internet as a tool to communicate with our target audience to show our dominance in the clothing industry.

Internet Advertising

XYZ Company needs to focus advertising on internet sites that appeal to young people. According to surveys, 72% of our target market uses the internet for five hours or more per week. The following list shows in order of popularity the most frequented sites:

  • Google
  • Facebook
  • Myspace
  • EBay
  • iTunes

Shifting our efforts from our other media sources such as radio and magazine to these popular internet sites will more effectively promote our product sales. Young adults are spending more and more time on the internet downloading music, communicating and researching for homework and less and less time reading paper magazines and listening to the radio. As the trend for cultural icons to go digital, so must our marketing plans.

Television Advertising

It used to be common to advertise for our products on shows like Friends and Seinfeld for our target audience, but even the face of television is changing. Young adults are tuning into reality television shows for their entertainment. Results from the focus group show that our target audience is most interested in shows like American Idol,The Apprentice, and America’s Next Top Model. The only non-reality television show to be ranked in the top ten most commonly watched shows by males and females 18-25 is Desperate Housewives. At Blue Incorporated, we need to focus our advertising budget on reality television shows and reduce the amount of advertising spent on other programs.

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