The Childcare Company is a childcare facility. Operational costs are: variable cost of operations is $200 per child per month, and fixed costs amount to $3,200 per month. Each child is charged $600 per child per month. Although the the facility has the capacity to handle 32 children, the current number of children served is only 10.

The manager has operated the business out of her checkbook with few other accounting records. However, she is now desperate for some information:

1. What is the Company's current monthly profit? (SHOW YOUR CALCULATIONS!)

2. What will their monthly profit be if they lose two students? (SHOW YOUR CALCULATIONS!)

The manager believes that it may be possible to double their students from the current level of 10 students per month to 20 students per month. To achieve this increase in volume, the manager will need to spend an additional $500 in fixed costs for promotional activities each month. Should the manager proceed with the promotional activities?

3. In order to answer this question, calculate the current break even point, and then calculate the new break even point if the additional $500 is spent on promotional activities. Hint: remember the break even formula: Break even = Fixed Costs/Contribution Margin per unit. Does the new break even point make it worthwhile to spend the additional $500? (SHOW YOUR CALCULATIONS!)

4. Is the manager's plan a good idea?

Required: Prepare a report to the manager responding to each of her questions. Use cost volume profit concepts in developing your response.