Question

Chapter 18 Lead Question Discussion Post

The Teddy Bear Company operates a day-care facility. The variable cost of operations is $200 per child per month. The fixed costs amount to $3,200 per month. Teddy Bear charges $600 per child per month for their services. Although the Teddy Bear Company has the capacity to handle 32 children, the current number of children served is only 10.

The manager has operated the business out of her checkbook with few other accounting records. However, she is now desperate for some information. What is the Teddy Bear Company’s current monthly profit? What will their monthly profit be if they lose two students? The manager believes that it may be possible to double their students from the current level of 10 students per month to 20 students per month. To achieve this increase in volume, the manager will need to spend an additional $500 in fixed costs for promotional activities each month. Should the manager proceed with the promotional activities? Is the manager's plan a good idea?

Required:

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

Answer 1

The Teddy bear company operaates a day care facility and serves10 students per month for a charge of $ 600 per child per month basis. However the company has a capacity to serve 32 children

The variable cost per child is $ 200 , and fixed cost for the month is $ 3200.

A)

At current level of 10 students the Monthly profit of the company is calculated as follows:

Sales = 10 children * $ 600 per child =  $ 6,000 , variable cost = 10 children * $200 per child = $ 2000.

Thus Contribution Margin = Sales - Variable cost = $ 6000 - $ 2000 = $ 4,000. fixed cost given = $ 3200.

So profit for month at level of 10 students = Contribution margin - Fixed cost = $ 4,000 - $ 3,200

Thus Teddy bear companies current month profit = $ 800

B) What will be monthly profit if the company loose 2 students, sow students will be= 8 ,

So sales = 8 children * $ 600 per child = $ 4,800 , variable cost = 8 children * $200 per child = $ 1600

Thus Contribution Margin = Sales - Variable cost = $ 4,800 - $ 1,600 = $ 3,200. fixed cost given = $ 3200.

So profit for month at level of 8 students = Contribution margin - Fixed cost = $ 3,200 - $ 3,200

Thus Teddy bear companies current month profit = $ 0 , this level is called as break even where there is no profit or no loss, in order to survive the company should have atleast 8 students.

C)

The managers beleive that if the additional $500 in fixed costs for promotional activities each month is incurred it will double the students i.e 20 students, the analysis of profit if 20 students are there with an additional cost of $ 500.

The fixed cost will increase by $ 500 making total fixed cost = $ 3,700 ( 3200 + 500 ) .

Sales will be = 20 children * $ 600 per child = $ 12,000 , and variable cost = 20 children * $ 200 per child = $ 4,000.

Thus contribution margin = Sales - variable cost = $ 12,000 - $ 4,000 = $ 8,000.

Profit if 20 students are there = Contribution margin - Fixed cost = $ 8,000 - $ 3,700 = $ 4,300.

Profi if additional promotional expenditure is incurred = $ 4,300.

Should the manager proceed with the promotional activities? Is the manager's plan a good idea? :

It is cleraly seen that , the profit under existing case = $ 800 per month, and if the additional promotional expense is incurred, the profit rises to $ 4,300 , so there is net increase of $ 3500 in Profit if additional expenditure is made.

Thus manager should definitely proceed with the promotional activities. and the managers plan is a good idea.