*The Franks will use straight line depreciation. For monthly calculations, use 4.33 weeks per month.

Patrick and Doris Frank are a married couple. They both worked for a plastics company for 30 years. At age 57, Patrick, and age 52, Doris, retired and moved to the small town of Murfreesboro, NC, which has a population of approximately 3,500 residents. When the Franks moved to the town, they decided to start a child care business in their home called The Gingerbread House.

The Gingerbread House is licensed by the state. The state charges an annual fee of $275 to maintain the license. Insurance is required at a cost of $3,960 annually. The facility is licensed to care for a maximum of six children. The Franks charge a fee of $800 per month for each child. The monthly fee is based on a full day of care, from 8 AM to 4 PM. If additional time is required beyond 4, 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 the snack is $3.60 per child per day. There are six children currently enrolled.

The facility is very nice. It is an 840 square foot addition to their home that was built in 1966. The Franks 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 Franks 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 $560. 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, Hawkeye Laundry and Dry Cleaning, can launder clothing for the Franks, including pick up and delivery, for $56 per month. Alternatively, the Franks 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 Family Dollar would cost $37 every quarter. The final alternative is for the Franks to purchase a washer and a dryer. The washer would cost $460 and the dryer would cost $390. The additional accessories and installation for both appliances cost $44.36. The store will deliver the appliances at a total cost of $34. Both appliances are expected to last 8 years. According to the manufacturer the washer will increase energy costs by $130 each year. The dryer will increase energy costs by $160 per year.

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

1. Consider the different types of costs discussed in this course. List and identify the costs discussed in the case.
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? Show your calculations for each alternative. Which option should they select?
4. The couple has made a significant investment in this business. How long will it take for 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? Explain.
5. The Franks have a wait list for their daycare. They can hire an employee for $10 per hour for 40 hours each week. With the additional employee, the Franks can accept three additional children. Should the Franks hire the additional employee? Show your calculations.
6. The Franks home can accommodate a maximum of nine children. They can move the daycare from their home to rented space in a nearby town which can accommodate up to 14 children. The space will cost $675 per month and the utilities will cost $140 per month. Additionally, insurance will now cost the Franks $5,200 per year. Per state regulations, each adult can supervise no more than 3 children. Should they continue to operate the facility at home or should they rent the space in town? How many children should they accept? How many employees will they need to hire? Show your calculations.