Question

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