Management Accounting Case Studies

Management Accounting Case Studies
Part A – Case Study Analysis for Douglas and Pamela Frank
Case Introduction:
Mr. and Mrs. Frank, a married couple are retired now. They moved to the town of Ovilla,
Texas and wish to open child day care facility at Nanna’s House (their home). They want
to understand the profitability of the business and take decision on number of employees
that they should hire, no. of children that they should enroll and other important business
decision.
Answer 1:
Costs are expenditure that one must pay to generate revenues for the firm. There are
various types of cost mentioned in the case. Three types of cost with one example of each
from the case are listed as below:
a. Fixed Cost: They are fixed in nature and must be paid out or incurred even if the
business is temporarily shut down. They are not affected by the activity level of the
company.
Example: Annual Insurance Cost of $3,840.
b. Variable Cost: They vary or change with the activity level of the company and are
incurred only when the operations of the company are running.
Example: Cost of meals and snack for each child per day at $3.20.
c. Capital Cost: These are costs which are incurred for a long period of time and
create some asset for the concern. They enhance the performance of the company.
Once incurred, it is not possible to reverse the expenses. It is generally one time
lumpsum payment.
Example: Renovation cost of the home @ $79,500. The benefit of this is increase in
useful life of the home by 25 years.
Answer 2:
The couple has an option to purchase some appliances and do the laundry themselves at
their home by the use of these purchased appliances. There are various costs and
information as mentioned in the text, the information that is relevant to the decision of
purchasing the appliances are:
 Purchase price or cost of the appliances
 Cost of the additional accessories which is required for installing the appliances
 Cost of installation of the appliances
 Delivery costs charged by the store for delivery of the appliances
 Increase in energy costs due to the use of appliances
 Life of the appliances
 Information on costs of other available options for laundry to the couple as if some
other options give them a lower cost, the couple might not need to purchase the
appliances.

Management Accounting Case Studies
The information which are irrelevant to the decision to purchase the appliances are:
 Purchase cost of the old appliances
 Life of the old appliances
 Cost of the insurance
 Annual license fee
 Cost of meals and snacks per children
 Cost of the renovation made
The above information is irrelevant as they will not affect the decision. For example, the
information on license fee is of no use when deciding on the appliance purchase.
Answer 3:
The couple once the facility starts running in full swing will definitely need a laundry facility
to launder the spoiled clothes of the children that are enrolled, launder the blankets, bed
sheet and other clothes. The couple after analysis of the market has provided information
about 3 different options that are available to them for the laundry requirement.
These 3 different options are listed as below:
 Using the services of the nearby company by the name of Red Oak Laundry and
dry cleaning. The company has proposed the monthly service at a rate of $52 per
month which includes free pickup and delivery of the clothes.
 The couple can also use the services of a Laundromat which is 3 miles away from
their place. The couple would have to travel to the Laundromat once a week and do
the service at a cost of $8 per week. For this they will have to purchase the
detergent at their own cost.
 The final option for them is to purchase the appliances and do the laundry
themselves at their own place only.
The computation of cost with workings under each of the available alternative is as below:
Alternative 1: Using the services of Red Oak Laundry and dry cleaning
Annual Cost
Proposed charges by the company per month $ 52.00
Multiply by No. of months in a year 12
Total Annual Expense (Monthly Charges * no. of
months in a year) $ 624.00
Alternative 2: Using the services of a Laundromat
Annual Cost
Cost of driving to the facility:
(3 miles one way * 2 ways x $ 0.56/mile per week * 52 weeks $ 174.72
Charges for services of laundering ($8.00 per week x 52
weeks) $ 416.00
Cost of Detergent ($ 35 per quarter x 4 quarters) $ 140.00
Total Annual Cost to the couple $ 730.42

Management Accounting Case Studies
Alternative 3: Purchasing the appliances and doing the laundry themselves
Annual Cost
Cost of the appliances (WN -1) $ 109.84
Incremental Cost on the Energy per year
($120 for washer and $145 for dryer)
$ 265.00
Cost of Detergent ($ 35 per quarter x 4 quarters) $ 140.00
Total Annual Cost to the couple $514.84
Working Note 1
Purchase cost of the Washer $ 420.00
Purchase cost of the dryer $ 380.00
Installation Cost of the accessories $ 43.72
Delivery Cost of the appliances by the store $ 35.00
Total Costs to be incurred $ 878.72
Life of the appliances (in years) 8
Therefore, Annual expenses on the appliances
($ 878.72 / 8) $ 109.84
The cost to the couple for laundering the clothes under each of the above alternatives is as
below:
 Using the services of the nearby company by the name of Red Oak Laundry and
dry cleaning. The company has proposed the monthly service at a rate of $52 per
month which includes free pickup and delivery of the clothes - $624
 The couple can also use the services of a Laundromat which is 3 miles away from
their place. The couple would have to travel to the Laundromat once a week and do
the service at a cost of $8 per week. For this they will have to purchase the
detergent at their own cost - $730.42
 The final option for them is to purchase the appliances and do the laundry
themselves at their own place only - $514.84