Birzeit University
MBA Program
Managerial Accounting 631
Fall Semester 2019/2020
CASE
# 1 12/10/2019
Case Material
Daoud and Salma Salem are a married couple. They both worked for a textile company for 30 years. At age 57, Daoud and age 52, Salma retired and moved to live in a small town which has a population of approximately 3,500 residents. When the Salems moved to the town, they decided to start a child care business in their home called Tata’s Home.
Tata’s Home is licensed by the city. The city 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 Salems 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 Salems 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 day-care increased the Salems’ 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 laundry company nearby can launder clothing for the Salems, including pick-up and delivery, for $52 per month. Alternatively, the Salems 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 Supermarket would cost $35 every quarter. The final alternative is for the Salems 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 Salems need some assistance in decision making and evaluation. They have contacted Hanadi, their accountant, to provide some advice.
Requirements:
Respond to the following Case Discussion Questions to help Daoud and Salma make their decisions.
Case Discussion Questions
(If necessary, the Salems will use straight line depreciation. For monthly calculations, use 4.33 weeks per month.)
1. Consider the different types of costs discussed in this course. List the costs discussed in the case and provide one specific example of each.
EXAMPLE.
Cost
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Specific example
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Fixed cost
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Annual license fee for $225. The license fee does not change regardless of the couple’s activities.
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Note: You cannot use this specific example of a fixed cost. There are however other fixed costs that you may use.
2. 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?
3. What could it cost the couple to launder clothes? Show your detailed calculations for each.
4. The couple has made a significant investment in this business. How long will it take for the couple to recoup their investment? Is the time required to recoup the investment a good measure of the success of the company? If not, how would you measure the success of the company? Explain.
5. As Hanadi, prepare a letter to the Salems advising them on their laundry needs. What is your recommendation and why?
6. The Salems have a wait list for their day-care. They can hire an employee for $9 per hour for 40 hours each week. With the additional employee, the Salems can accept three additional children. Should the Salems hire the additional employee? Show your detailed calculations.
7. The Salems home can accommodate a maximum of nine children. They can move the day-care 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 Salems $5,000 per year. Per city regulations, each adult can supervise no more than three children. As Hanadi, prepare a letter to the Salems 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.