Case Study Analysis

Frank and Ellen Morrison are a married couple. They both worked for a railroad company for 30years. At age 57, Frank and age 52, Ellen retired and moved to the small town of Ovilla, TX, whichhas a population of approximately 3,500 residents. When the Morrisons moved to the town, they decided tostart a child care business in their home called Harmonys House.Harmonys House is licensed by the state. The state charges an annual fee of $225 to maintain thelicense. Insurance is required at a cost of $3,840 annually.

The facility is licensed to care for a maximumof six children. The Morrisons 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 mustpay an additional charge of $15 per hour for each child. The couple provides two meals and a snack forthe children. The cost of the meals and snack is $3.20 per child per day. There are six children currentlyenrolled.The facility is very nice. It is an 820 square foot addition to their home that was built in 1964.

TheMorrisons purchased the home and completed the renovations for $79,500 and they believe the addition has auseful life of 25 years. The facility has a large open space for play, reading, and other activities. There is asection for sleeping which contains small cots. The facility is equipped with a small kitchen, twobathrooms 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 oldand had been used by the couple for many years. The old appliances cost a total of $440. While a laundryroom was not initially a necessity, it became increasingly important for laundering the soiled clothes ofthe children, blankets, and sheets. A company nearby, Red Oak Laundry and Dry Cleaning, can launderclothing for the Morrisons, including pick-up and delivery, for $52 per month. Alternatively, the Morrisons cantake clothes to the laundromat once a week, which is three miles away (one way). The applicable mileagerate is $0.56/mile. They can launder the clothes themselves at a cost of $8 per week.

The self-servicealternative does not include detergent or fabric sheets. The couple would need to purchase these items inorder to use the laundromat. Purchasing laundry supplies in bulk from MegaMart would cost $35 every quarter. The final alternative is for the Morrisons to purchase a washer and dryer. The cost of the appliancesis: 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 theappliances is free. Both appliances are expected to last 8 years. According to the manufacturer the washerwill increase energy costs by $120 per year. The dryer will increase energy costs by $145 per year.The Morrisons need some assistance in decision making and evaluation. They have contacted you, their accountant, to provide some advice.

Note: Students must answer the following questions regarding the case and provide support to their arguments with specific examples from the case.

Question 1: Consider the different types of costs discussed in this course. List the costs discussed in the case andprovide one specific example of each.

Question 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?