### Homework Post

Jul. 8th, 2012 11:16 am**fr_stories**

Post question:

**The Teddy Bear Child Care Company operates a day-care facility. The variable cost of operations is $200 per child permonth. The fixed Costs amount to $3,200 per month. Teddy Bear charges $600 per child per month for theirservices. Although the Teddy Bear Company has the capacity to handle 32 children; the current number of childrenserved is only 10.**

**The manager has operated the business out of her checkbook with few other accounting records. Now she isdesperate for some information. What is the Teddy Bear Company’s current monthly profit? What will their monthlyprofits be if they lose 2 students? The manager believes that if may be possible to double their students from thecurrent level of 10 students to 20 students. To achieve this increase in volume the manager will need to spend anadditional $500 in fixed cost promotional activities each month.**

**Prepare a report to the manager responding to each of her questions. Use cost volume profit concepts in developingyour response.**

Post Title: Can Child Care = Profit?

To one's sanity: no, but that is irrelevant.

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Variable Costs = $200 per child (costs increase $200 for each child)

Fixed Costs = $3200 per month

Selling Price = $600 per child per month

# of Products (Children) = 10

Use the Breakeven Analylsis equation first to see if the comapny is even making a profit.

Sales Revenue - Variable Costs - Fixed Costs = Operating Income

$6000 - $2000 - $3200 = $800

$800 profit on 10 students. Neat, but $800 per month could hardly pay the manager's personal, non-business bills in any state.

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What happens if the parents of 2 students don't like what's going on at Teddy Bear Child Care Company, remove their children , and enroll them at rival Teddy Ruxpin Kiddie Kare?

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Variable Costs = $200 per child (costs increase $200 for each child)

Fixed Costs = $3200 per month

Selling Price = $600 per child per month

# of Products (Children) = 8

$4800 - $1600 - $3200 = 0

8 students is the Breakeven point. The point at which there is no Net Income or Net Loss.

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Fortunately for Manager, she thinks she can double the number of current students by spending only $500 per month on advertising.

To calculate an increase the profit, an extra $500 in fixed costs is spent.

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Variable Costs = $200 per child (costs increase $200 for each child)

Fixed Costs = $3700 per month

Selling Price = $600 per child per month

# of Products (Children) = 20

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$12000 - $4000 - $3700 = $4300

$4300 profit on 20 students. That's a $3500 profit increase with only a $500 expense increase.

Much better profit and a good investment for only an extra $500 per month.