The memo seeks to provide you with information on the available expansion options and suitable investment opportunities for Middlehurst House daycare center. The aim is to give information on the most profitable and cost effective approaches of running the institution. Several calculations are carried out for the classes of the different age groups at the institution. First, the amount of increase in tuition fee that is required to keep the current level of profit will be estimated. The table presented below shows the calculations for the required increase in tuition that is necessary to keep the current level of profit.
|Age||Class ratio||Number of classes||Children per class||Total children||Monthly tuition per child||Total fee|
|2 to 3||6 to 1||4||6||20||320||6,400|
|3 to 4||8 to 1||2||8||15||280||4,200|
|4 to 5||8 to 1||2||8||15||280||4,200|
|5 to 6||10 to 1||3||10||30||260||7,800|
|The required number of instructors||11||Total revenue||22,600|
The initial amount of revenue is $22,600 while the total costs amount to $21,000. Thus, the initial amount of profit is $1,600. By lowering the size of the class, the entity will need to hire five additional instructors. The growth in the number of instructors increases the total cost from the current level of $9,600 to the new level $17,600. Apart from the cost of salaries, the expenses relating to staff benefits will grow by $1800. Further, the other expenses will not be affected by the decision to reduce the class size. Thus, the total additional expenses will amount to $9,800. The company will need additional revenue amounting to $9,800 in order to maintain the same level of profit. The increase in revenue is equivalent to 43%. From the survey carried out, it can be noted that an increase in fee to a tune of 43% will not be welcomed by the parents. Therefore, the idea of reducing the class size might create losses for the company (Collier, 2009). The increase in the fee can be broken down a presented in the table below.
|Age||Percentage increase||Increase in dollars|
|2 to 3||60%||$196|
|3 to 4||44%||$131|
|4 to 5||44%||$131|
|5 to 6||24%||$65|
From the calculations above, if the fee is increased by 43%, then the revenue will increase by 71%. The company is likely to increase its profits if the new fee structure is implemented and the current number of students does not change.
Further, it will be important to evaluate the viability of creating new classes for students on the waiting list. The table presented below shows the calculation of the incremental revenue arising from creating a new class.
|Number of students||11|
|Monthly tuition per child||260|
|Total revenue from fees||2,860|
|Total variable expenses||2,274|
At the moment, the company has a total of 11 students who are between the age of 5 and 6 years on the waiting list. Thus, if the company decides to create a new class, then it will require one new instructor. Further, if the new class is created, the additional cost incurred will amount to $2,274 dollars. The revenue will also increase by $2,860. Therefore, the net gain at the end of the month is $586. It can be noted that the company will gain by implementing this proposal. Generally, the profitability of customers fluctuates to a larger extent. The trend that is common in most businesses is that 20% of customers generate the largest proportion of all profits. This scenario also applies in the case of Middlehurst House. From the calculations, it can be observed that it is only profitable to create classes for the age group 5 to 6. This age group is the most profitable because the number of students meets the threshold opportunity. In this case, the number students in the waiting list for the other age groups do not meet the required threshold. Therefore, they are likely to generate losses for the company. It can be observed that the number of students in the other age groups do not meet the required threshold for a class. The company will make losses if classes are created for the other age groups. The management should only consider expanding the class for children that are between the age 5 and 6 only (Hansen, Mowen, & Guan, 2009).
The third important item to look at is the profitability of creating classes of smaller sizes. The idea of going to smaller classes is feasible if the company can at least maintain the current level of profit or generate a higher amount of profit. The calculation of new number of children in each age group is presented below.
|Age group||Number of classes||Children per class||Total children||Monthly tuition/ child|
|2 to 3||3||9,8,8||25||$320|
|3 to 4||2||11||22||$280|
|4 to 5||2||9,10||19||$280|
|5 to 6||3||14,14,13||41||$260|
The table presented below show the calculations of the tuition fee with the old fee structure.
|Age group||Monthly tuition||Total students||Total tuition|
|2 to 3||$320||25||$8,000|
|3 to 4||$280||22||$6,160|
|4 to 5||$280||19||$5,320|
|5 to 6||$260||41||$10,660|
Calculation of total tuition fee within the new fee structure is summarized in the table below.
|Age group||Monthly tuition||Total students||Total tuition|
|2 to 3||$516||25||$12,900|
|3 to 4||$411||22||$9,042|
|4 to 5||$411||19||$7,809|
|5 to 6||$325||41||$13,325|
From the calculations, the total revenue that will be generated after increasing the class size is $30,140 (with the old fee structure). The initial expenses amount to $21,000. Apart from these initial expenses, the company will have to incur an additional cost amounting to $6,400 for the four instructors and an additional $1,440 for their benefits. These expenses totals to $7,840. The resulting total profit is $1,300. The initial profit for the company is $1,600 as estimated in the previous section. However, with the new fee structure after the proposed increase, the total revenue will amount to $43,076. The net income will be $14,236. Therefore, the company will gain if the class size is lowered and the new fee structure is used (DuBrin, 2008).
The final item to evaluate is the profitability of creating a class for children who are aged between 0 and 24 months. It is expected that the class will have an infant to teacher ratio of 5 to 1. Further, the tuition fees will be the same as that of age 2 to 3 which is $320. The idea of opening an infant care class with five infants will generate additional revenue for the company. In this case, the revenue for five children will be $1,600 while the expenses will be $1,960. If the company maintains five children, then it will make a loss of $360. Therefore, for this idea to be profitable, the company needs more than 6 students in this category.
In summary, the extent to which fee can be increased if the class size is lowered was determined. The analysis shows that the fee needs to grow by 43% in order to retain the current profitability. The fee for the group between 2 and 3 years will be increased by 60%, 3 to 4 years by 44%, 4 to 5 years by 44%, and class of 5 to 6 years by 24%. However, this may not be achievable since the parents are unwilling to pay higher school fees. In the second case, there are a large number of students in each age group in the waiting list. Thus, there is a possibility that the center can gain if the number of classes for each age group is increased. The analysis carried out in the section above shows that the institution will gain if a class is created for children between the age of 5 and 6 (Anderson, Sweeney, Williams, Camm, & Martin, 2011). Creation of classes for children of the other age groups will result in losses. Further, the option of lowering the size of classes and increasing the fee will result in additional profits for the entity. Finally, creation of new classes for infants can only be profitable if the company admits more than 6 children. Therefore, the management needs to pursue two options, which are creating a class for children in the waiting list who are between the age of 5 and 6, and increasing fees after lowering the class size.
Apart from the financial analysis that has been carried out, there are non-financial factors that should be evaluated before making a final decision on the option to pursue. For instance, if the company decides to lower the class size and increase the amount of fee per student, the target market will change. In this case, the company will no longer be appealing to the low income earners. This factor will affect enrollment because the company is likely to lose clients from the low income group. This can be considered as a strategic marketing move that seeks to differentiate the products of the institution on the basis of fees charged. Further, by differentiating the products, the company will enter into a new market segment that has several players. However, the company will need to evaluate the effect of competition on profitability. In the case of other options, such as increasing class size and introducing infant care, the company will need to evaluate if it has the capacity to offer quality and affordable services and compete favorably in the market.
The customer inserts his/her name_________________
Anderson, D., Sweeney, D., Williams, T., Camm, J., & Martin, K. (2011). An introduction to management science: Quantitative approaches to decision making. USA: Cengage Learning.
Collier, P. (2009). Accounting for managers. USA: John Wiley & Sons Ltd.
DuBrin, A. (2008). Essentials of management. USA: Cengage Learning.
Hansen, R., Mowen, M., & Guan, L. (2009). Cost management: accounting & control. USA: South Western Cengage Learning.