Discuss at least three alternatives for improving the overall profitability of the daycare facility. How would you implement those three alternatives and the potential results?
Discuss at least three alternatives for improving the overall profitability of the daycare facility. How would you implement those three alternatives and the potential results?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
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Discuss at least three alternatives for improving the overall profitability of the daycare facility. How would you implement those three alternatives and the potential results?
Transcribed Image Text:Truman State University
BACKGROUND
The Appaloosa County Day Care Center, Inc. (ACDC)
began operations in a vacant warehouse retrofitted with
bathrooms and kitchen facilities. ACDC's mission is to
provide quality, affordable childcare to the residents of the
community and surrounding area. The service area is a
rural, economically depressed county that continually ranks
in the lowest 10 percent of per-capita income in the state.
The organization's seven-member board of directors is
comprised of volunteer representatives from various agencies
throughout the community-the school district, community
college, hospital, Department of Human Services, etc.
The board members bring a breadth of human services
experience to the oversight of the day care, but most do not
possess an accounting or financial background. While they
were committed to the financial viability of the day care,
they initially focused on the center's mission-to provide
affordable childcare to working-class families. As a result, the
board set childcare rates to achieve their goal of affordability
rather than assuring adequate revenues to provide high-
quality services while reaching breakeven points.
Truman State University
From s founding, the center faced another
significant challenge. The center was the first of its kind
in the community, so negative perceptions about using
"institutionally" provided day care were prevalent. Local
families preferred to use in-home childcare provided by
friends or relatives. These perceptions and preferences,
coupled with poor administrative practices, caused the center
to struggle continually to meet i financial obligations.
Exhibit 1
Department of Human Services
Excerpt from Childcare Regulations
IMA EDUCATIONAL CASE JOURNAL
Staff ratio. The staff-to-child ratio shall be as follows:
Age of Children
Two weeks to two years
Two years
Three years
Four years
Five years to ten years
Ten years and over
Minimum Ratio of Staff to Children
One to every 4 children
One to every 6 children
One to every 8 children
One to every 12 children
One to every 15 children
One to every 20 children
Source Department of Human Services, 2008. Child Care Center and Preschools
Licensing Standards and Procedures Comm. 204, Augas.
In addition. labor, other costs that impact day care
center operations include occupancy costs, food, insurance,
supplies, and programming expenses. Occupancy and
food costs are also highly influenced by the Department
of Human Services, as a facility must provide a minimum
amount of space per child (based on age) and follow specific
nutritional guidelines in preparing meals and snacks.
ACDC PLANNING AND OPERATIONS
About five years into operations, a new board of directors
was appointed and strategic objectives were developed. As
its first strategic actions, the board replaced the Center's
administration and developed specific operating procedures
to keep the facility afloat financially. In order to eliminate
the community's negative perceptions of institutionalized
childcare, the board decided to move the center to a higher-
quality facility. After further study, the board concluded
that constructing a new facility would be the best option
for providing quality childcare in an attractive and safe
environment. In addition, the new building would house
the community's federally-funded Head Start program and
the local school district's handicapped pre-school program,
as these programs were housed in inadequate facilities.
Thus, the ACDC board spearheaded the construction of an
8,000-square-foot building that would be owned by ACDC,
Inc., and funded in part by a federal grant and a loan from
the local USDA Rural Development Office.
During the planning and construction of the new facility
but prior to its opening, the ACDC board had to resolve a
number of issues. First and foremost, the board did not want
IMA EDUCATIONAL CASE JOURNAL
FOOD COSTS
The center provides food for ACDC patrons, but it does
not charge a separate fee to recover the cost of snacks or
meals. The cost of food is included as part of the tuition fee.
In addition, the employees are required to remain on-site
during the lunch hour order to maintain the staff-to-child
ratio, so their meals are also provided by the center. All
children and classroom staff receive breakfast, lunch, and
two snacks a day.
OCCUPANCY COSTS
Building: Because ACDC worked in conjunction with the
local school district and the Head Start program prior to
constructing the new facility, the building was purposely
built larger than the space required by the day care only.
Consequently, when it came time to analyze costs, it was
the board's opinion that the Head Start and school district
programs should share in the costs of the loan and building
(i.e., interest expense and depreciation).
Utilities: When ACDC designed the facility, it considered the
needs of the tenants and designed their rooms accordingly.
The board did not have the foresight, however, to set up the
tenants' rooms with their own gas, electric, and water meters.
Therefore, all of the utilities are measured through common
meters, and ACDC pays the bills for the entire facility. The
only exception to this is the telephone expense, as each
program contracts and pays for its own phone service. See
Exhibit 2 for details.
Maintenance, etc.: As specified in the lease agreement,
ACDC pays the entire building's expenses related to
maintenance, cleaning supplies, and sanitation. See Exhibit
2 for details.
INSURANCE COSTS
ACDC has four different insurance costs: property, general
liability, officer's bond, and worker's compensation. The
property insurance covers the entire building. The general
liability insurance covers the children and staff in the ACDC
program and helps protect the center against accidents or
claims against the staff. The tenants must carry their own
liability insurance. The bond insurance on the officers covers
the center for any inappropriate handling of financial matters
by the board of directors. Finally, the worker's compensation
insurance covers the administration and ACDC employees
for work-related injuries.
ACDC was almost forced to close its doors on more than
one occasion. The financial performance of ACDC is not
unusual, s many community-based day care facilities
struggle to remain open.
Truman State University
DAY CARE INDUSTRY REVENUE AND COST PATTERNS
As an industry, day care facilities generally operate with
very low profit margins. Typical for-profit day care profit
margins are approximately 4 percent, with about 70 percent
of a center's total costs attributed to wages and other
employee-related costs (Helbumn 1995, 172, 176). The state's
Department of Human Services' licensing regulations drive a
significant level of employee-related costs. These regulations
mandate a strict staff-to-child ratio that all licensed facilities
must follow. For example, infant care (ages two weeks to two
years) regulations require at least one staff member for every
mom recams
four children (see excerpt from regulations in Exhibit 1).
Thus, if a center pays just the minimum wage (federal wage
currently $7.25 per hour, $7.80 w/taxes), at least $1.95 per
hour would need to be charged for each infant just to cover
the cost of the employee. Additionally, one must consider
how revenues are affected when there are fewer than four
infants per employee scheduled in the nursery. When the
ratio drops, income per hour drops; however, the full hourly
wage to the employee remains the same and an immediate
loss ccurs. See Ex ibit 1 the complete Department of
Human Service staff ratio requirements.
VOL. 3, NO. 4, ART. 3, DECEMBER 2010
to raise the childcare rates, for fear that doing so would deter
people from patronizing the facility. On the other hand, the
board was not at all positive that the existing rates would cover
the costs associated with the new building. In addition, ACDC
was becoming a landlord, and this created additional concerns
for the board. ACDC agreed to lease floor space or rooms to
the Head Start program and school district, perform facility
maintenance, and provide utilities. ACDC did not provide any
furniture or fixtures. The board's main question: How much
rent should ACDC charge the tenants? The ACDC board
researched the lease rates charged to the area's commercial
retail facilities and determined that $20 per 100 square feet
was the going rate and decided to charge their tenants at
this rate. Because the board members were not experienced
in making financial and capital expenditure decisions, they
did not fully consider that this rate was for floor space only;
commercial leaseholders typically pay all of their own utilities,
sanitation, and maintenance fees. Thus, the board had
inadvertently created the potential for a future financial crisis
for ACDC. Selected post-construction revenues, costs, and
operational information for ACDC follow.
ACDC COST STRUCTURE
LABOR COSTS
ACDC maintains a staff of employees assigned to each age-
level classroom that is in compliance with DHS guidelines.
The staff schedule is rotated throughout the week so
that the staff-to-child ratio is always maintained while no
one employee works more than 40 hours per week. The
employer's labor costs include the wages, FICA (7.65%), and
the SUTA rate (1%). The facility does not offer any other
employee benefits. (See Table 1)
Table 1
Payroll Detail
Administrative
Kitchen
Infant care
Toddler care
Pre-K care
Totals
Wages
$ 13,750
9,000
19,250
38,500
29,000
$109,500
VOL. 3, NO. 4, ART. 3, DECEMBER 2010
Exhibit 2
Excerpt from Building Lease
Taxes
$1,190
780
1,665
Total
Payroll
$ 14,940
9,780
20,915
3,330
41,830
2510
31,510
$9,475 $118,975
IT IS AGREED this 1st day of July, 20xx, by and between
Appaloosa County Day Care Center, Inc., hereinafter referred to
as Landlord; and Head Start, hereinafter referred to as Tenants:
That the Landlord hereby leases to the Tenants and the Tenants hereby lease
from the Landlord the following premises situated in Appaloosa County, USA
Three rooms and an office (2650 sq. ft.) in the "ACDC" day care center as
specified in the building plans, in consideration of the mutual promises of the
parties here in and upon the terms, provisions, and conditions following:
1.LEASE PERIOD. The term of this lease shall be for a period of twelve
months starting July 1, 20xx
2. RENT. Tenants shall pay rental for the period as follows: $530.00 on the 1st
day of July and $530.00 on the 1st day of each month thereafter during the
lease pericd; said rental thus at all times to be paid in advance for the month.
The Landlord will pay all utilities, maintenance, and custodial services on the
building. The Landlord reserves all remaining rooms for their use or lease.
OTHER OPERATING COSTS
A complete listing of the organization's operating expenses
is shown in Table 2. The costs not previously discussed
include administrative or program costs such as accounting.
advertising, continuing education, and supplies. These costs
are attributable solely to ACDC.
THE ACCOUNTANT'S CHALLENGE
Rather than addressing the revenue and cost issues that
arose during the facility construction, the board took a "wait
and see" position and opted to review both the childcare
rates and rental rates after the new facility had begun
operations. After the first year of building occupancy, the
ACDC board wanted to evaluate the costs and revenues
associated with each of the day care's and tenants' programs.
A
You are the center's accountant (and the only individual on
the board with significant financial knowledge), so the other
board members have asked you to explain why the center is
running at a loss. You indicate that you believe that both the
childcare rates and rental rates were set without establishing
correlation to the costs that they were intended to cover.
You also state that you want to take the time to complete
a thorough cost and profitability analysis of the day care's
childcare programs and tenant agreements. In order to do so,
you decide to implement an activity-based costing system to
allocate costs to the various programs and tenants.
Transcribed Image Text:Appaloosa County Day Care Center, Inc.
Kristen Irwin
Truman State University
BACKGROUND
The Appaloosa County Day Care Center, Inc. (ACDC)
began operations in a vacant warehouse retrofitted with
bathrooms and kitchen facilities. ACDC's mission is to
provide quality, affordable childcare to the residents of the
community and surrounding area. The service area is a
rural, economically depressed county that continually ranks
in the lowest 10 percent of per-capita income in the state.
The organization's seven-member board of directors is
comprised of volunteer representatives from various agencies
throughout the community-the school district, community
college, hospital, Department of Human Services, etc.
The board members bring a breadth of human services
experience to the oversight of the day care,
possess an accounting or financial background. While they
were committed to the financial viability of the day care,
they initially focused on the center's mission-to provide
affordable childcare to working-class families. As a result, the
board set childcare rates to achieve their goal of affordability
rather than assuring adequate revenues to provide high-
quality services while reaching breakeven points.
most do not
From its founding, the center faced another
significant challenge. The center was the first of its kind
in the community, so negative perceptions about using
"institutionally" provided day care were prevalent. Local
Debra Kerby
Truman State University
families preferred to use in-home childcare provided by
friends or relatives. These perceptions and preferences,
coupled with poor administrative practices, caused the center
to struggle continually to meet its financial obligations.
Exhibit 1
Department of Human Services
Excerpt from Childcare Regulations
IMA EDUCATIONAL CASE JOURNAL
Four years
Five years to ten years
Ten years and over
Staff ratio. The staff-to-child ratio shall be as follows:
Age of Children
Two weeks to two years.
Two years
Three years
Minimum Ratio of Staff to Children
One to every 4 children.
One to every 8 children
One to every 8 children
One to every 12 children
One to every 15 children
One to every 20 children
Souce Department of Human Services 2008 Child Care Cenon and Preschools
Licensing Standards and Procedures. Comm 34, August
In addition to labor, other costs that impact day care
center operations include occupancy costs, food, insurance,
supplies, and programming expenses. Occupancy and
food costs are also highly influenced by the Department
of Human Services, as a facility must provide a minimum
amount of space per child (based on age) and follow specific
nutritional guidelines in preparing meals and snacks.
ACDC PLANNING AND OPERATIONS
About five years into operations, a new board of directors
was appointed and strategic objectives were developed. As
its first strategic actions, the board replaced the Center's
administration and developed specific operating procedures
to keep the facility afloat financially. In order to eliminate
the community's negative perceptions of institutionalized.
childcare, the board decided to move the center to a higher-
quality facility. After further study, the board concluded.
that construct a new facility would be the best option
for providing quality childcare in an attractive and safe
environment. In addition, the new building would house
the community's federally-funded Head Start program and
the local school district's handicapped pre-school program,
as these programs were housed in inadequate facilities.
Thus, the ACDC board spearheaded the construction of an
8,000-square-foot building that would be owned by ACDC,
Inc., and funded in part by a federal grant and a loan from
the local USDA Rural Development Office.
During the planning and construction of the new facility
but prior to its opening, the ACDC board had to resolve a
number of issues. First and foremost, the board did not want
IMA EDUCATIONAL CASE JOURNAL
FOOD COSTS
The center provides food for ACDC patrons, but it does
not charge a separate fee to recover the cost of snacks or
meals. The cost of food is included as part of the tuition fee.
In addition, the employees are required to remain on-site
during the lunch hour in order to maintain the staff-to-child
ratio, so their meals are also provided I y the center. All
children and classroom staff receive breakfast, lunch, and
two snacks a day.
OCCUPANCY COSTS
Building: Because ACDC worked in conjunction with the
local school district and the Head Start program prior to
constructing the new facility, the building was purposely
built larger than the space required by the day care only.
Consequently, when it came time to analyze costs, it was
the board's opinion that the Head Start and school district
programs should share in the costs of the loan and building
(i.e., interest expense and depreciation).
Utilities: When ACDC designed the facility, it considered the
needs of the tenants and designed their rooms accordingly.
The board did not have the foresight, however, to set up the
tenants' rooms with their own gas, electric, and water meters.
Therefore, all of the utilities are measured through common
meters, and ACDC pays the bills for the entire facility. The
only exception this is the telephone expense, as each
program contracts and pays for its own phone service. See
Exhibit 2 for details,
Maintenance, etc.: As specified in the lease agreement,
ACDC pays the entire building's expenses related to
maintenance, cleaning supplies, and sanitation. See Exhibit
2 for details.
INSURANCE COSTS
ACDC has four different insurance costs: property, general
liability, officer's bond, and worker's compensation. The
property insurance covers the entire building. The general
liability insurance covers the children and staff in the ACDC
program and helps protect the center against accidents or
claims against the staff. The tenants must carry their own
liability insurance. The bond insurance on the officers covers
the center for any inappropriate handling of financial matters
by the board of directors. Finally, the worker's compensation
insurance covers the administration and ACDC employees
for work-related injuries.
ACDC was almost forced to close its doors on more than
one occasion. The financial performance of ACDC is not
unusual, as many community-based day care facilities
struggle to remain open.
DAY CARE INDUSTRY REVENUE AND COST PATTERNS
As an industry, day care facilities generally operate with
very low profit margins. Typical for-profit day care profit
margins are approximately 4 percent, with about 70 percent
of a center's total costs attributed to wages and other
employee-related costs (Helburn 1995, 172, 176). The state's
Department of Human Services' licensing regulations drive a
significant level of employee-related costs. These regulations
mandate a strict staff-to-child ratio that all licensed facilities
must follow. For example, infant care (ages two weeks to two
years) regulations require at least one staff member for every
four children (see excerpt from regulations in Exhibit 1).
Thus, if a center pays just the minimum wage (federal wage
currently $7.25 per hour, $7.80 w/taxes), at least $1.95 per
hour would need to be charged for each infant just to cover
the cost of the employee. Additionally, one must consider
how revenues are affected when there are fewer than four
infants per employee scheduled in the nursery. When the
ratio drops, income per hour drops; however, the full hourly
wage to the employee remains the same and an immediate
loss occurs. See Exhibit 1 for the complete Department of
Human Service staff ratio requirements.
VOL. 3, NO. 4, ART. 3, DECEMBER 2010
Sandra Weber
Truman State University
to raise the childcare rates, for fear that doing so would deter
people from patronizing the facility. On the other hand, the
board was not at all positive that the existing rates would cover
the costs associated with the new building. In addition, ACDC
was becoming a landlord, and this created additional concerns
for the board. ACDC agreed to lease floor space or rooms to
the Head Start program and school district, perform facility
maintenance, and provide utilities. ACDC did not provide any
furniture or fixtures. The board's main question: How much
rent should ACDC charge the tenants? The ACDC board
researched the lease rates charged to the area's commercial
retail facilities and determined that $20 per 100 square feet
was the going rate and decided to charge their tenants at
this rate. Because the board members were not experienced
in making financial and capital expenditure decisions, they
did not fully consider that this rate was for floor space only;
commercial leaseholders typically pay all of their own utilities,
sanitation, and maintenance fees. Thus, the board had
inadvertently created the potential for a future financial crisis
for ACDC. Selected post-construction revenues, costs, and
operational information for ACDC follow.
ACDC COST STRUCTURE
Table 1
Payroll Detail
LABOR COSTS
ACDC maintains a staff of employees assigned to each age-
level classroom that is in compliance with DHS guidelines.
The staff schedule is rotated throughout the week so
that the staff-to-child ratio is always maintained while no
one employee works more than 40 hours per week. The
employer's labor costs include the wages, FICA (7.65%), and
the SUTA rate (1%). The facility does not offer any other
employee benefits. (See Table 1)
Administrative
Kitchen
Infant care
Pre-K care
Totals
ISSN 1940-204X
Wages
$ 13.750
9,000
19,250
38,500
29,000
$109,500
VOL. 3, NO. 4, ART. 3, DECEMBER 2010
Exhibit 2
Excerpt from Building Lease
Taxes
$1,190
780
1.665
3,330
$9,475
Total
Payroll
$14,940
9,780
20,915
41,830
31.510
$118.975
IT IS AGREED this 1st day of July, 20xx, by and between
Appaloosa County Day Care Center, Inc., hereinafter referred to
as Landlord; and Head Start, hereinafter referred to as Tenants:
That the Landlord hereby leases to the Tenants and the Tenants hereby lease
from the Landlord the following premises situated in Appaloosa County, USA,
Three rooms and an office (2650 sq. ft.) in the "ACDC" day care center as
specified in the building plans, in consideration of the mutual promises of the
parties herein and upon the terms, provisions, and conditions following:
1.LEASE PERIOD. The term of this lease shall be for a period of twelve
months starting July 1, 20
2. RENT. Tenants shall pay rental for the period as follows $530.00 on the 1st
day of July and $530.00 on the 1st day of each month thereafter during the
lease period, said rental thus at all times to be paid in advance for the month.
The Landlord will pay all utilities, maintenance, and custodial services on the
building. The Landlord reserves all remaining rooms for their use or lease.
OTHER OPERATING COSTS
A complete listing of the organization's operating expenses
is shown in Table 2. The costs not previously discussed
include administrative or program costs such as accounting.
advertising, continuing education, and supplies. These costs
are attributable solely to ACDC,
THE ACCOUNTANT'S CHALLENGE
Rather than addressing the revenue and cost issues that
arose during the facility construction, the board took a "wait
and see" position and opted to review both the childcare
rates and rental rates after the new facility had begun
operations. After the first year of building occupancy, the
ACDC board d to evaluate the costs
associated with each of the day care's and tenants' programs.
You are the center's accountant (and the only individual on
the board with significant financial knowledge), so the other
board members have asked you to explain why the center is
running at a loss. You indicate that you believe that both the
childcare rates and rental rates were set without establishing
correlation to the costs that they were intended to cover
You also state that you want to take the time to complete
a thorough cost and profitability analysis of the day care's
childcare programs and tenant agreements. In order to do so,
you decide to implement an activity-based costing system to
allocate costs to the various programs and tenants.
revenues
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