Question

_{Young School for Wee People}

_{Introduction
Young School for Wee People (YSWP) had been running a small, for-profit preschool program
for young children between the ages of two and four for several decades. YSWP was one of
several privately run programs in the suburban Philadelphia area. For each of the three age
groups (i.e., two-, three- and four-year olds), there were two classes per day for a total of six
classes in the facility each day. The classes were held both in the morning and in the afternoon,
five days a week between September and June; there were approximately 200 days (40
weeks), or 1,200 class meetings, per year.1 Only about one-third of YSWP’s local competitors
offered classes during the summer months. The morning classes ran from 9:00 a.m. to noon,
and the afternoon meetings ran from 1:00 p.m. to 4:00 p.m. Lunch was not served in either
class. However, each class served a snack to the children. Class size varied from nine to 15
students per class. Although there was a lot of pressure from parents to reduce class sizes, a
recent article in an industry newsletter showed that, given current demographics, the market
for such programs could increase by 10% a year for the next five years.
The year before, a parent suggested that the school begin hosting birthday parties on the
weekend. Since YSWP’s three classrooms were empty during this time, it seemed like a good
use of the space and could generate additional revenue. Over the past year, the school had
managed to quickly build a sizable side business hosting birthday parties. Approximately 150
parties were held in the school’s three classrooms on Saturdays and Sundays throughout the
year. The parties were typically attended by 10–20 children and ran for approximately four
hours. The four-hour running time included the time necessary to set up and clean up the
facility. For this service, the school’s main competitors consisted of children’s gyms, arts and
crafts stores, and museums. Each had been offering specialized birthday parties for many
years and charged very high prices. As a result, YSWP was able to significantly underprice
these other firms while maintaining a very high profit margin. In fact, due to the success of the
birthday parties over the past year, YSWP wanted to expand this business. YSWP was
considering switching the bulk of its advertising campaign from one that was designed to build
general awareness of the school to one that was specifically directed at promoting the birthday
party business.}

_{1 Each day there was a morning class and an afternoon class for two-year olds, another morning and afternoon
class for three-year olds, and a morning and afternoon class for four-year olds.}

_{Current Cost System
YSWP’s largest expense was related to the building (see Exhibit 1 for an income statement).
YSWP had initially purchased a single-family home and converted it to a daycare/schoolhouse
setting. The house cost $400,000, including $50,000 for the necessary renovations and license
applications. Building- related expenses included depreciation, utilities, maintenance, cleaning,
property taxes, and so forth. Traditionally, these costs were assigned to the classes on a per
class-meeting basis. The building-related costs had not significantly changed since the
introduction of the birthday party business. Therefore, no building-related costs had been
assigned to the new product.
Salaries, supplies, and food were also allocated based on the meeting, where a meeting was
either a single class meeting for three hours or a single birthday party for four hours. The actual
cost of supplies and food for all of last year’s birthday parties was $3,000; the actual cost for
the preschool classes was approximately $18,000. YSWP had five employees—three full time
and two part time. The school’s director earned $50,000, taught two of the preschool classes
each day, and administered both the preschool and the birthday party programs. She spent
approximately 20% of her time in administration, evenly split between the two programs. The
remaining two full-time employees earned $20,000 per year and taught the other four
preschool classes. Finally, YSWP had hired two part-time employees to run the birthday parties
on weekends, and each earned $5,000 per year. The director had approximately 20 years of
daycare and teaching experience, the full-time teachers each had approximately five years of
teaching experience, and the part-time employees were college students majoring in child
development or education.
As advertising was used to build awareness of YSWP’s presence in the community and
affected both products, it was not allocated to either product.
Pricing
YSWP charged $200 for each birthday party, regardless of how many children attended, and
averaged a total of about $270 for each preschool class session, depending on the number of
students in the class. This was an increase over fiscal-year 2003, when preschool charges
totaled only $240 per class session, even though average class size declined from 12 to 10
students.
Each year, YSWP management prepared a budget for the next year that was exactly equal to
the prior year’s actual results.}

_{Further Changes
Currently, the children’s day was split up between a two-hour core class and a one-hour
elective. The elective aimed to bring new ideas and teaching styles into the classroom.
However, YSWP believed that its core competency lay in delivering a solid, core class to the
children. This method had been successful in preparing children for the move to kindergarten.
Additionally, the elective had not been successful as an experimental setting to test new
teaching styles and ideas; in fact, the elective had become merely an extension of the core
class. Consequently, YSWP planned to abolish the elective class and only offer the standard,
core class.
Additionally, YSWP was considering purchasing a neighborhood school. As part of the
expansion, YSWP’s director would have more administrative responsibility. She had hired
another teacher to cover her classes as well as two administrative assistants to help with the
daily operations of YSWP.}

<sub>Questions
1. Compute the cost of a single preschool class and a single birthday party using the current
cost system.
2. Would you recommend that YSWP continue to allocate the building-related costs only to
the preschool program? What alternative allocation method would you suggest? Justify
your answer. Ignore consideration of excess capacity discussed in question 3 below for this
answer. Please discuss any additional information that you feel is needed.
3. For three months each year (June–August), the school building is largely unused except for
the birthday parties. This represents approximately 60 days, or 360 additional classes that
could be run but are not. How should YSWP account for this excess capacity? Please
explain why you recommend this method.
4. Do you agree with YSWP’s allocation method for salaries, supplies, and food? Why or why
not? Be specific about any alternative allocation methods that you would consider.
5. Do you agree with YSWP’s decision not to allocate the cost of advertising? Why or why
not? Be specific about any alternative allocation methods that you would consider.
6. Compute the cost per class meeting and per birthday party under the assumptions that you
have made.
7. How could YSWP use the information from the revised cost information to enhance
profitability?
8. Briefly explain the change in the average revenues per class (from $240 to $270 per class
between last year and this year). What other information would you collect to help explain
the variation?
9. Would you recommend that YSWP proceed with an expansion? List the pros and cons of
making such a change along with the underlying reasoning.
10. The board has an increased concern about maintaining control of YSWP as it expands.
Until now, it has not used a formal control system. What control systems, if any, would you
suggest that it establish? Be sure to clearly explain your answer thoroughly.</sub>

_{Exhibit 1}

_{Young School for Wee People
Income Statement
for the Year Ended June 30, 2002}

_{Revenue $354,000
Expenses:
Building Related $216,000
Salaries 100,000
Food and Supplies 21,000
Advertising 10,000
Total Expenses 347,000}

_{Net Profit $ 7,000}

Answer 1

1.

Cost Activity	Pre School Classes	Birthday
Supplies	18,000.00	3,000.00
Director Salary	40,000.00
Administration Cost	5,000.00	5,000.00
Two Employees	40,000.00
Two Part Time Employees		10,000.00
Total Cost	103,000.00	18,000.00
Total Class/Birthday Party	1,200.00	150.00
Single Class/Party	85.83	120.00
Building Related Cost	180.00
YSWP Charged	270.00	200.00
Profit	4.17	80.00

2. Yes I will recommend that YSWP should allocate the building related cost to Preschool Classes.as if we allocate cost to both activity then cost of Birthday party will be more as compared to YSWP Charged so building related cost is fullly allocate to Preschool activity.

4. I am agree with YSWP allocation method of Salaries, Supplies & food this give better picture of profit as employee who is looking the activity so that salaries goes to that activty it will show exact profit & we can easilly identified the cost driver activity.

5. Yes i am agree with YSWP’s decision not to allocate the cost of advertising, as they can give advertising for the for the preshool classes only main business is of school activity so need to allocate advertsing expenses.

6.

Cost Activity	Pre School Classes	Birthday
Supplies	18,000.00	3,000.00
Director Salary	40,000.00
Administration Cost	5,000.00	5,000.00
Two Employees	40,000.00
Two Part Time Employees		10,000.00
Advertising Expenses	10,000.00
Building Related Cost(On the basis of class)	216,000.00
Total Cost	329,000.00	18,000.00
Total Class/Birthday Party	1,200.00	150.00
Single Class/Party	274.17	120.00
YSWP Charged	270.00	200.00

8.

Cost Activity	Pre School Classes	Birthday	Total
Supplies	18,000.00	3,000.00
Director Salary	40,000.00
Administration Cost	5,000.00	5,000.00
Two Employees	40,000.00
Two Part Time Employees		10,000.00
Advertising Expenses	10,000.00
Building Related Cost(On the basis of class)	216,000.00
Total Cost	329,000.00	18,000.00	347,000.00
Total Class/Birthday Party	1,200.00	150.00
Single Class/Party	274.17	120.00
YSWP Charged	240.00	200.00
	288,000.00	30,000.00	318,000.00
		Profit	(29,000.00)

if we will not charge of $270 then there will be loss of $29,000.