Group Case Study 2: Cost Determination and Decision Making Submission Date: 12 November 2021 Fairus and Fariza are a married couple. They both served with the airline company before their contract was terminated due to the pandemic Covid-19. At age 45, Fairus and age 40, Fariza moved back to their hometown in Kuala Selangor. They are plan to start a child care business at their home, Kid Fun House (KFH) Child Care. To run child care, they must get a permit from the Welfare department. The annual fee for the license is RM450. However, the insurance cost is much higher due to the pandemic, which is RM7,680 annually. The licensed facility is allowed to care for a maximum of twelve children. Fairus plans to charge a fee of RM800 per month for each child. The monthly fee will base on a full day of care, from 7:30 am to 5:30 pm. If additional time is required beyond 5:30 pm, parents must pay an additional charge of RM10 per hour for each child. KFH will provide two meals and a snack for the children. The cost of the meals and snacks is RM4.50 per child per day. Currently, Fairus has a very nice facility that is suitable for the child care centre. It is a 1,200 square foot addition to their home. Fairus purchased the house and completed the renovations for RM159,000. He believes the addition has a useful life of 40 years. The facility has ample open space for play, reading, and a section for sleeping which contains small cots. The facility is also equipped with a small kitchen, two bathrooms, and a small laundry area. It is expected that child care operations will increase Fairus utility cost by RM100 each month. The washer and dryer that are placed in the laundry area have been used for many years and are pretty old. Early this month, Fairus incurred an RM1,500 cost of new piping and tile for the laundry area. The laundry area can be used as an additional bathroom if the appliances do not place there. The appliances were bought for a total cost of RM2,200. While a laundry room was not initially necessary, it is essential if Fairus is serious about opening the child care. It will be used for laundering the soiled clothes of the children, blankets, and sheets. However, there are a few available alternatives that can be used for laundry, which are: Alternative 1: A laundry service nearby, Pelangi Laundry and Dry Cleaning, offering launder clothing suitable for KFH. Their services include pick-up and delivery, for only RM104 per month. However, it is based on a contractual basis of one year. The monthly commitment is fixed regardless of whether services are used or not. Alternative 2: Fairus can take clothes to the launderette once a week, about six kilometers away (one way). The applicable mileage rate is RM0.28/km. They can launder the clothes themselves at the cost of RM15 per week. However, the self-service alternative does not include detergent or fabric sheets. Fairus would need to purchase these items to use the launderette. The estimated cost of buying laundry supplies from the Speed-mart is around RM25 per month. Alternative 3: Fairus is to purchase a washer and dryer. The cost of a washer is RM1,540, and a dryer is RM1,760. The additional cost needed is the installation at RM90 and delivery at RM70 for both. The appliances are expected to last eight(8) years. According to the seller, the washer and dryer will increase energy costs by RM20 and RM24 per year. Similar to the second alternative, the estimated cost of detergent is around RM25 per month. Special Offer from the Competitor Nour Salam Child Care (NSCC) contacted Fairus to let them run the child care canter there. They will pay rental to Fairus at RM1,800 per month. Fairus and Fariza would have the opportunity to do other jobs if they opted to rent their home to NSCC. Among other options is to be a teacher, teaching English and mathematic at the nearby tuition center. They estimated that they could earn up to RM3,000 per month for each person. However, they feel pretty reluctant due to the significant investment and efforts already being made for the child care center. Requirements Respond to the following Case Discussion Questions to help Fairus and Fariza make their decisions. You Tube Video: The Sunk Cost F The Sunk Cost Fallacy: What is it and why does it happen? allacy: What is it and why does it happen? -- YouTubeYouTube https://www.youtube.com/watch?v=_mq4Ch4KzXk https://www.youtube.com/watch?v=_mq4Ch4KzXk QUESTION 1 [16 marks] Consider the different types of costs discussed in this course. List the costs discussed in the case and provide two specific examples of each. Cost Item Fixed cost Variable cost Sunk cost Fixed cost/Incremental cost (2/ marks x 2 items x 4 types = 16 marks) QUESTION 2 [14 marks] Based on the information provided, what information is relevant to the decision to purchase the appliances? What information is irrelevant to the decision to buy the appliances? Explain other costs or considerations to be taken before the decision to purchase the machines can be made? QUESTION 3 [14 marks] What could it cost the KFH to launder clothes annually? Show your detailed calculations for each alternative. QUESTION 4 [16 marks] Assume that Fairus has made a significant investment in this business where the renovation made and repaired piping was solely for child care. How long will it take for him to recoup their investment? Is the time required to recoup the investment a good measure of the success of the company? If not, how would you measure the success of the company? Explain. (hint: calculate the ROI and payback period) QUESTION 5 [20 Marks] In evaluating whether to rent out the house to NSCC, critically discuss the "sunk" and "opportunity" costs, and their relevancy in the decision-making process. State what decision Fairus should make according to the information given, supporting your answer with a calculation. What should qualitative factors Fairus consider in evaluating the alternatives he had?