Question

2-B2 Cost-Volume-Profit at a Day Care Facility Luke Morrison opened Luke's Corner, a small day care facility, just over 2 years ago. After a rocky start, Luke's Corner has been thriving. Morrison is now preparing a budget for November 20X7. Monthly fixed costs for Luke's Corner are as follows: Rent Salaries Other fixed costs Total fixed costs $ 800 1,400 140 $ 2,340 The salary is for Anna Dukes, the only employee, who works with Morrison by caring for the children. Morrison does not pay himself a salary, but he receives the excess of revenues over costs each month. The cost driver for variable costs is "child-days." One child-day is one day in day care for one child, and the variable cost is $12 per child-day. The facility is open from 6:00 AM to 6:00 PM weekdays (that is, Monday-Friday), and there are 22 weekdays in November 20X7. An average day has 8 children attending Luke's Comer. State law prohibits Luke's Corner from having more than 14 children, a limit it has never reached. Morrison charges $30 per day per child, regardless of how long the child is at the facility. 1. What is the break-even point for November in child-days? In revenue dollars? 2. Suppose attendance for November 20X7 is equal to the average, resulting in 22 X 8 = 176 child-days. What amount will Morrison have left after paying all expenses? 3. Suppose both costs and attendance are difficult to predict. Compute the amount Morrison will have left after paying all expenses for each of the following situations. Consider each case inde- pendently. a. Average attendance is 9 children per day instead of 8, generating 198 child-days. b. Variable costs increase to $14 per child-day. c. Rent increases by $220 per month. d. Morrison spends $300 on advertising (a fixed cost) in November, which increases average daily attendance to 9.5 children. e. Morrison begins charging $33 per day on November 1, and average daily attendance slips to 7 children.

Answer 1

i	Revenue per day per Child	$              30
ii	Variable Cost per child day	$              12
iii	Contribution per child day (i-ii)	$              18
iv	Total Fixed Costs	$        2,340
v	Break Even Point ( Child Days) (iv/iii)	130
vii	Break Even Point ( Revenue) (v*i)	$        3,900
2
i	Revenue per day per Child	$              30
ii	Variable Cost per child day	$              12
iii	Contribution per child day (i-ii)	$              18
iv	Child Days	176
v	Contribution for November (iii*iv)	$        3,168
vi	Total Fixed Costs	$        2,340
vii	Profit (v-vi)	$           828
3. a
i	Revenue per day per Child	$              30
ii	Variable Cost per child day	$              12
iii	Contribution per child day (i-ii)	$              18
iv	Child Days	198
v	Contribution for November (iii*iv)	$        3,564
vi	Total Fixed Costs	$        2,340
vii	Profit (v-vi)	$        1,224
3. b
i	Revenue per day per Child	$              30
ii	Variable Cost per child day	$              14
iii	Contribution per child day (i-ii)	$              16
iv	Child Days	176
v	Contribution for November (iii*iv)	$        2,816
vi	Total Fixed Costs	$        2,340
vii	Profit (v-vi)	$           476
3. c
i	Revenue per day per Child	$              30
ii	Variable Cost per child day	$              12
iii	Contribution per child day (i-ii)	$              18
iv	Child Days	176
v	Contribution for November (iii*iv)	$        3,168
vi	Total Fixed Costs ( $2340+$220)	$        2,560
vii	Profit (v-vi)	$           608
3. d
i	Revenue per day per Child	$              30
ii	Variable Cost per child day	$              12
iii	Contribution per child day (i-ii)	$              18
iv	Child Days (22 Days*9.5)	209
v	Contribution for November (iii*iv)	$        3,762
vi	Total Fixed Costs ( $2340+$300)	$        2,640
vii	Profit (v-vi)	$        1,122
3. e
i	Revenue per day per Child	$              33
ii	Variable Cost per child day	$              12
iii	Contribution per child day (i-ii)	$              21
iv	Child Days (22 Days*7)	154
v	Contribution for November (iii*iv)	$        3,234
vi	Total Fixed Costs	$        2,640
vii	Profit (v-vi)	$           594