–

time cook and occupancy and other administrative

expenses. The salary of the director is fixed

—

as a partnership, this is in reality a distribution of

profits, but it is included in expenses for comparative purposes

.

Food is $1.25 per student per day. Staff benefits are 10 percent of salaries plus $200 per person

for benefit programs for instructors and the part

–

time cook. Variable supplies are $1 per student

per month. Step costs are salaries for instructors, avera

ging $1,600 per instructor per class.

Friedman wants to increase the quality of service by decreasing class sizes and also by

expanding student enrollments. These alternatives are interrelated. Friedman thinks that class

sizes are too large and that child

ren are not getting the individual attention they require.

Friedman surveyed parents of all 80 students to measure their support for a tuition increase tied

to a reduction in class size. For children ages 2 to 5, most parents would support a 25 percent

tui

tion increase, and nearly 50 percent would support a 50 percent increase. Of the 5

–

to

–

6 age

group parents, nearly three fourths did not want any increase. The remainder said they would

support a 25 percent increase but no more.

Proper class size is very s

ubjective. However, Friedman feels that he could achieve a child/

instructor ratio of 6 to 1 for the 2

–

to

–

3 age group, an 8 to 1 ratio for the 3

–

to

–

4 and 4

–

to

–

5 age

groups, and a 10 to 1 ratio for the 5

–

to

–

6 age group.

The center has easily maintained the 80

–

student level, with each class full. Friedman keeps in

touch with waiting

–

list parents to make certain each is still interested. This list provides children

when someone leaves the center. The current waiting list is

as follows:

Age

group

Number of children

Age

group

Number of children

2 to 3

5

4 to 5

4

3 to 4

7

5 to 6

11

Friedman does not start a new class unless more students are on the

waiting list than are required

per class. Obviously, enough students are on the 5

–

to

–

6 age group waiting list to start a new class.

Lately, however, he has wondered if the center could make a profit by starting classes with fewer

than the requisite number,

taking the chance that new students would appear and could be added

immediately.

Information from his various inquiries implies that a potential market for quality infant care (0 to

24 months) exists. Friedman doesn’t think this expansion would be profit

able. However, he has

never done an analysis of the situation and has not thought about an appropriate tuition. He

believes that the infant/instructor ratio in his center should be no higher than 5 infants to one

instructor. The center would have no food c

osts for the infants.

at or above the current profit level.

Friedman does not start a new class unless more students are on the waiting list than are required

pe

r class. Obviously, enough students are on the 5

–

to

–

6 age group waiting list to start a new class.

Lately, however, he has wondered if the center could make a profit by starting classes with fewer

than the requisite number, taking the chance that new stude

nts would appear and could be added

immediately.

Information from his various inquiries implies that a potential market for quality infant care (0 to

24 months) exists. Friedman doesn’t think this expansion would be profitable. However, he has

never done

an analysis of the situation and has not thought about an appropriate tuition. He

believes that the infant/instructor ratio in his center should be no higher than 5 infants to one

instructor. The center would have no food costs for the infants.

Compton wi

ll only agree to Friedman’s suggested changes if the center will continue to operate

at or above the current profit level.

Questions:

1.

Look at each decision separately, as incremental to the current situation, and evaluate the

marginal profit:

a.

If class si

ze is decreased (keeping the same 80 students), what increase in tuition

is necessary to keep the current monthly profit level?

b.

Without regard to (a), is it profitable to create the new class from the waiting list?

Explain.

c.

Use the new fee structure as fou

nd in (a). Is it profitable to move to smaller class

sizes, if new full classes are created and filled to their new maximums using the

waiting list? Show calculations.

d.

Is a class for infant care profitable if tuition is the same as the proposed class

tuiti

on for the 2

–

to

–

3 age group?

2.

Write a brief memo to Friedman and Compton highlighting any concerns that underlie

the analyses you have performed in Part 1.