Hi, How do I compute the "average tuition increase" (part "a" of case guidance, located toward the bottom of this message). The homework assignment and case template is attached below. Need help with Part A "average tuition increase".

CASE 9A - MIDDLEHURST HOUSE

Middlehurst House is a daycare center/preschool which operates as a partnership of George Friedman and Bill Compton. It is in a single building that has a capacity limit of 120 children and meets city and state regulations. At present, the center has six classes, all at maximum sizes, structured as follows:

Number of classes

Children per class

Total children

Monthly tuition per child 2 to 3 2 10 20 $320 3 to 4 1 15 15 280 4 to 5 1 15 15 280 5 to 6 2 15 30 260

Class sizes are determined by state law which sets a limit on the number of children per instructor. The center uses one instructor per classroom.

Tuition is charged monthly. Minor adjustments are made on an individual basis. In October, the most recent month with data available, revenues were $21,500 ($22,600 less $1,100 adjustments). Monthly revenues should be rather stable since classes are full most of the time.

Expenses for October were:

Salaries for instructors $9,600Salary of director 2,000 Salary of part-time cook 900 Food expenses 2,200 Staff benefits expenses 2,450 Supplies expenses 600 Occupancy and other administrative expenses 3,250 Total expenses $21,000

Fixed expenses are the salary of the part-time cook and occupancy and other administrative expenses. The salary of the director is fixedas 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, averaging $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 children 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 tuition 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 subjective. 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.

Questions:

1. Look at each decision separately, as incremental to the current situation, and evaluate the marginal profit: a. If class size is decreased (keeping the same 80 students), what increase in tuition is necessary to keep the current monthly profit level?

Case Guidance

Part a.

For Part A, you will calculate the Incremental Costs for each Age Group and then determine the Tuition Change Rate. Below is the example for the age Group 2-3 and you can follow the same logic and complete the calculations for the other three Age Groups.

Percentage

NewIncrease

InstructorAverageover

to StudentTotalNumber ofIncrementalTuitionCurrent

AgeRatioChildren New Classes CostsIncrease Tuition

2-3 6:1202$3,920$196.0061%

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