Case Study Analysis: Cost Considerations and Decision Making

Part A - Case Study Analysis
Answer to Question 1:
The three different types of cost considered in the unit are:
1. Fixed Cost: These are those costs which do not change with the activity level.
An example of such cost in the unit is annual maintenance fees for the
license of $225.
2. Variable Cost: These are those costs which vary with the activity levels. An
example of such cost in the unit is monthly fee of $800 per child. This varies
with the number of child.
3. Sunk Cost: these are those costs which have already been incurred and are
thus irrelevant for any decision making. An example of such cost in the unit
is the renovation cost of the house $79,500.
Answer to Question 2:
Relevant costs are those which are incremental to a particular decision and if the
decision is made these costs are unavoidable and must be incurred and hence
relevant for decision making.
The couple is considering purchasing the appliances which include a washer and
dryer for clothes. There are various costs related to the same. Here, the relevant
costs for the decision to purchase the appliances are:
 Cost of the appliances
 Installation cost of the new appliances
 Delivery charge of the appliances
 Cost of additional accessories required for installation
 Increase in energy costs
The irrelevant information for the decision to purchase the appliances is:
 Cost of the old appliances

Answer to Question 3:
For laundering clothes, the couple has 3 options which includes purchasing the
appliances, taking clothes to the Laundromat and launder themselves or hire Red
Oak Laundry and Dry Cleaning for cleaning.
The cost against each of these is computed as below:
Option 1: Hiring laundry services from Red Oak Laundry and Dry Cleaning at a
cost of $52 per week
Option 1: Availing Laundry Service from Red Oak Laundry
and Dry Cleaning
Monthly cost for pickup/delivery service $52
Number of months of service $12
Total annual cost for pickup/delivery service
$62
4
The total cost under option 1 is $624.
Option 2: Visiting the Laundromat themselves once a week.
Option 2: Self-serve laundry
Cost of Driving
Distance travelled per week (3 miles one way) 6
Mileage Rate $0.56
No. of Weeks in a year 52
Cost of Driving $174.72
Cost of Laundering Clothes
Cost to launder per week $8.00
No. of Weeks in a year 52
Cost of Laundering Clothes $416
Cost of Detergent
Purchase cost from Megamart per quarter $35.00
No. of Quarter in a year 4
Cost of Detergent $140
Total Annual Cost $730.72
The total cost under option 2 is $731.

Option 3: Purchasing the appliances and do the laundry at home
Option 3: Purchase the appliance
Cost of the appliances
Washer $420.00
Dryer $380.00
Cost of the appliances $800.00
Installation cost of accessories $43.72
Delivery charge of the appliance $35.00
Total cost of the appliance $878.72
Expected Life 8
Annual cost of the appliances (A) $109.84
Increase in Energy Cost (B) $265.00
Cost of Detergent
Purchase cost from Megamart per quarter $35.00
No. of Quarter in a year 4
Cost of Detergent (C ) $140.00
Total Annual Cost (A+B+C) $514.84
The total cost under option 3 is $514.84
Recommendation:
Based on the above computation it is evident that the couple should purchase the
appliances and do the laundry at home as the cost under this option is the lowest
at $514.84 per annum.
Answer to Question 4:
The couple can hire an employee for 40 hours at $9 per hour for each week. This
will enable them to take 3 more children. To explore this option, we will see the
incremental benefit.
The incremental monthly revenue in fees = $800 per child * 3 children = $2,400.
Incremental costs:
1. Cost of the employee = $9/hour * 40 hrs/wk * 4.33 wk/month = $1,558.80
2. Cost for food = $3.20/child/day * 3 children * 5 days per week * 4.33 weeks
per month = $207.84
Total incremental cost = $207.84 + $1,558.80 = $1,766.64

Net benefit = Incremental revenue – Incremental cost = $2,400 - $1,776.64 =
$633.36 per month.
Recommendation:
Based on the above computation it is evident that the couple should hire an
employee as the incremental revenue of $2,400 is more than the incremental cost
of $1,766.64, resulting into a net benefit of $633.36 per month to the couple.
Answer to Question 5:
From:
To,
Douglas and Pamela Frank,
14th May, 2019
Subject: Analysis and Recommendation on staying at home or moving to a lage
rented space.
Dear Mr. and Mrs Frank,
You currently have an option to move to a larger rented space in the town that can
accommodate maximum of 14 children. The costs will increase as well. The
recommendation on these can be made only after analysis of the net benefit to the
couple under all the possible scenarios.
The possible scenarios for you to consider are:
1. Remain at the same location and operate with
a. 6 Children
b. 9 Children
2. Move to a large rented space and operate with
a. 12 Children
b. 14 children