Middlehurst House. Complete Case 9A (Middlehurst House) in Chapter 9.
In this case, management is presented with several decision options. For this assignment, you are required to provide a three to five double-spaced written memo evaluating options and providing recommendations. The written memo should be properly formatted according to APA guidelines and demonstrate research and critical thinking skills. Evaluations and recommendations should be supported by at least 4 scholarly sources from the Ashford Library or other external sources, excluding the textbook. In Question 1, evaluate each decision separately in full detail including calculations, as necessary. The evaluation should be included as part of the memo discussion, not a separate component. Evaluations can be included as appendices, exhibits or figures; however must be properly referenced within the written content.
In Question 2, prepare a comprehensive business memo addressing each decision and your recommendation. The memo should be properly formatted as a business memo and formatted according to APA guidelines.
An example of a properly formatted business memo can be found at this link
Week 5 Written Assignment should:
Demonstrate graduate level work including appropriate research and critical thinking skills.
Be presented as a business memo (not a question/answer format).
Incorporate case questions into the overall analysis.
Follow APA formatting guidelines including title page, reference page and in-text citations.
Consists of three to five double-spaced pages of content.
Provide at least 4 scholarly sources, excluding the textbook.
As we are familiar with the case, we feel that two very important issues have not been addressed which in sufficient detail, given that it may influence the profitability of the business venture. These are
(1) The allocation of capital by both the partners and the stockholders
(2) Auditing of facilities and services so that expansion can be carried out later or even facility augmentation
(3) If such extension is meant to augment the profit of the partner, or to offset the losses (either of the two) than what steps can be taken to ensure this is viable, and the best economic process is thought off?
Let us first examine the conditions via which the initial capital allocation is made. In the case of the school, initial capital expenditure was $40,000. This capital is entirely given by Compton, and Freidman has no contribution in the capital. Freidman gives his services as the Director of operations (having experience in similar situations before). Compton’s initial $40,000 is enough for the initial purchases and the operating capital. At the end of the month, Freidman takes a salary as the director of the school, the amount: $2,000. Then after Freidman’s salary has been credited to Freidman’s account and debited from Salary account and all other expenses met, the balance remaining is distributed between the partners. The manner of distribution is 75% of the balance to Compton and 25% to Freidman.
This method of dividing the profit between the partners is slightly complicated. This is because after some time if either partner wants to calculate how much he or the other has invested in the school business, then the operation will be a little complex. What is proposed is that Compton’s money $4000 is given back to him with interest for 12 months on a monthly basis. Monetization of service is a tricky matter as questions come up regarding additional business which has been brought in by the service.
Therefore if interest is 12% compounded for an year, Compton will get at the end of the year= Principal (1+ rn) where r is the interest rate and n is the accounting cycle
=40000 x ( 1+0.12)=4000 x 1.12 =44800 p.a.
Hence, Compton gets 44800/12 every month $3733.00. Let us assume that Freidman gets no salary, but he lives on his profit shares. Therefore, every moth there are three main expenses, which are the fixed costs, the variable costs are deducted from the revenue earned in addition to and the operating cost of $5733.00. We have this figure which is to be earned first priority. The balance which remains is distributed less $2 only the capital provided by Compton is paid back to him. Now, we have two possible solutions to a case. These are
(A) Keep the student quantity at the previous level., or he original level, Going back to the original excel sheet, we get the status-quo as under
Initial Workings | |
Age Group | 2 to 3 | 3 to 4 | 4 to 5 | 5 to 6 | |
| | | | | |
Number of Students per Class | 10 | 15 | 15 | 15 | |
| | | | | |
Total Classes | 2 | 1 | 1 | 2 | |
| | | | | |
Total students per age group | 20 | 15 | 15 | 30 | |
| | | | | |
Fees Per child (in $) | 320 | 280 | 280 | 260 | |
| | | | | |
Revenue Per Age group | 6400 | 4200 | 4200 | 7800 | |
Therefore, total revenue=$( 22,600)
In conclusion, we have two points to make in this matter First of all the school is already undergoing cash flow problems. They have the capacity so if the additional capacity is too low to profit, then they should at least break even. Otherwise the extra elasticity in the market which they have already come to know will just be wasted which will be a pity. (JD Dana Jr, 1999)
Again the distribution of the proceeds is also made much easier now i.e. 50:50 is always and sounds very simple to 75:25.
Caplan, Dennis. (2011). Management Accounting: Concepts and Techniques, Part 3: Product Costing and Cost Allocations. Retrieved from http://classes.bus.oregonstate.edu/spring-07/ba422/Management%20Accounting%20Chapter%2011.htm
Lynch R, Williamson R (1984); Accounting for Management, Planning and Control, Tata Mc
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Schneider, A., (2012) Managerial Accounting: Manufacturing and Service Applications.
San Diego, CA. Bridgepoint Education, Inc