Peter and Martha Taylor are a married couple. They both worked for a construction company for 25 years. At age 56, Peter and age 54, Martha retired and moved to the small town of Zion, PA, which has a population of approximately 3,500 residents. When the Taylors moved to the town, they decided to start a child care business in their home called Nanna's House.

Nanna's House is licensed by the state. The state charges an annual fee of $225 to maintain the license. Insurance is required at a cost of $3,840 annually. The facility is licensed to care for a maximum of six children. The Taylors charge a fee of $800 per month for each child. The monthly fee is based on a full day of care, from 8:00 a.m. to 4:00 p.m. If additional time is required beyond 4:00 p.m., parents must pay an additional charge of $15 per hour for each child. The couple provides two meals and a snack for the children. The cost of the meals and snack is $3.20 per child per day. There are six children currently enrolled.

The facility is very nice. It is an 820 square foot addition to their home that was built in 1964. The Taylors purchased the home and completed the renovations for $79,500 and they believe the addition has a useful life of 25 years. The facility has a large open space for play, reading, and other activities. There is a section for sleeping which contains small cots. The facility is equipped with a small kitchen, two bathrooms and a small laundry area. The daycare increased the Taylors' utility cost by $50 each month.

During the first week of operations, the washer and dryer stopped working. Both appliances were old and had been used by the couple for many years. The old appliances cost a total of $440. While a laundry room was not initially a necessity, it became increasingly important for laundering the soiled clothes of the children, blankets, and sheets. A company nearby, Clean Laundry and Dry Cleaning, can launder clothing for the Taylors, including pick-up and delivery, for $52 per month. Alternatively, the Taylors can take clothes to the laundromat once a week, which is three miles away (one way). The applicable mileage rate is $0.56/mile. They can launder the clothes themselves at a cost of $8 per week. The self-service alternative does not include detergent or fabric sheets. The couple would need to purchase these items in order to use the laundromat. Purchasing laundry supplies in bulk from AliMart would cost $35 every quarter. The final alternative is for the Taylors to purchase a washer and dryer. The cost of the appliances is: washer $420 and dryer $380. The additional accessories for both appliances, needed for installation, cost $43.72. The store will deliver the appliances at a total cost of $35. The cost of installing the appliances is free. Both appliances are expected to last 8 years. According to the manufacturer the washer will increase energy costs by $120 per year. The dryer will increase energy costs by $145 per year.

The Taylors need some assistance in decision making and evaluation. They have contacted you, their accountant, to provide some advice.

Respond to the following to help Peter and Martha make their decisions (If necessary, the Taylors will use straight-line depreciation. For monthly calculations, use 4.33 weeks per month.)

1. Consider the different types of costs. List the costs discussed in the case and provide one specific example of each.

EXAMPLE.Fixed costAnnual license fee of $225.

The license fee does not change regardless of the couple's activities.

2. Based on the information provided, what information is relevant to the decision to purchase the appliances? What information is irrelevant to the decision to purchase the appliances? Why?

3. What could it cost the couple to launder clothes?

4. The couple has made a significant investment in this business. How long will it take the couple 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?

5. The Taylors have a wait list for their daycare. They can hire an employee for $9 per hour for 40 hours each week. With the additional employee, the Taylors can accept three additional children. Should the Taylors hire the additional employee?

6. The Taylors home can accommodate a maximum of nine children. They can move the daycare from their home to rented space in town, which can accommodate up to 14 children. The space will cost $650 per month and the utilities will cost $125 per month. Additionally, insurance will now cost the Taylors $5,000 per year. Per state regulations, each adult can supervise no more than three children. Should they continue to operate the facility at home or should they rent space in town? How many children should they accept? How many employees will they need to hire?