Red and Jake are both retired cops who served the City of Las Vegas for 35 years. A few years after retirement, they decided to open a security consulting business just like most retired cops do.
The firm is named Forest Security Services, LLC (FSSL) and is situated in a 1000 square foot mixed-used office located in the industrial section of town. The monthly rent is $5000 per month, and their monthly all-inclusive utility cost is $150 per month. FSSL is licensed by the state. The annual licensing fee for both city and state costs $500. In addition, their annual insurance costs $3000.
Red and Jake are well connected in the community and the local governmental agencies. Recently they are awarded the license to run a halfway home for youths that were remanded for further rehabilitation after their release and after serving a minor misdemeanor.
FSSL accepted the contract since their office is larger than their need for their security consulting business. They decided to make tenant improvements costing $10,000 to create a separation of the two businesses. 200 square feet of space was allocated for the consulting business and the remainder for the halfway home. These improvements allow them to admit 8 youths to the program. The FSSL halfway home program officially admitted the first batch of enrollees in February of this year. The program runs for a one-month term and consistently has 8 enrollees per month. The state pays FSSL $700 per youth per term. As an outpatient rehabilitation program, they are required to bring their meals and snacks for the duration of the program. Or they can pay an additional $200 per youth per term out of their own pocket for their meals and snacks for the entire term. During the first quarter, 6 enrollees every month purchase the meal plan. In the second quarter, 7 enrollees every month purchase the meal plan, and in the third and fourth quarter, 8 enrollees every month purchase the meal plan.
After the first month of operations, the refrigerator stopped working. The old and dying refrigerator has a salvage value of $300. This appliance is a necessity because all the meals and snacks are stored there. Their options: (a) have a meal delivery service every day that costs $1475 per month. (b) or pick up the pre-packaged meals themselves daily, which costs $35 per day for the food and $10 per day to cover gas and travel time (c) or purchase an industrial refrigerator for $12,000, not including installation and delivery of $100. Per FSSL lease,
installing any commercial grade appliance automatically increases their all-inclusive utility rate to $50 per month.
Other relevant cost information includes allocating all applicable costs based on the square footage of each cost center. The consulting business will not participate in the cost of the industrial refrigerator since they have a fully depreciated small dorm-size refrigerator in that area. Since the intake processing is done through the consulting business, FSSL will charge the halfway house business a $25 intake processing fee for each enrollee as part of their revenue. The consulting business earns $1000 per month during the first and second quarters and $1500 per month during the third and fourth quarters annually. Jake and Red each receive a $200 per month salary in the consulting business and $500 each on the halfway house business. FSSL adopts a calendar year basis in maintaining their books.
FSSL needs some assistance in decision-making and evaluation. Therefore, they have contacted YOUR COMPANY NAME HERE, their cost accountant, to provide some advice.
Case Discussion Questions:
(If necessary, the FSSL will use straight-line depreciation. Life of improvements and equipment is 5 years. For monthly calculations, use 4.33 weeks per month.)
1. Consider the different types of costs discussed in our course BACC531, Managerial Accounting. Next, list all the costs you can identify (your list has to be extensive to get the highest possible points in this category) as shown below.
Annual state & city license fee $500
The license fee does not change regardless of activity
2. Based on the information provided, what information is relevant to purchasing the refrigerator? What information is irrelevant to the decision to purchase the refrigerator? Why? Are there any other cost concepts you can derive that are not explicitly addressed in the case?
3. What could it cost FSSL if they opt not to invest in a new industrial refrigerator? Show your detailed calculations for each option for each month, per term, and for the period since they started. As a cost accountant, prepare a letter to FSSL advising them on their refrigeration needs. What is your recommendation, and why?
4. FSSL has made a significant investment in this business. How long will it take for FSSL to recoup its 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. FSSL initial year of operation that started February 2021, is very successful. Therefore, the state wants to add its enrollment to 2 youths per term starting January 2022. To do this, FSSL will need to hire 1 additional employee for $15 per hour for 40 hours each week. The cost of state and federal taxes and workers’ compensation insurance per employee is 1% of the gross earnings paid by the employer. Employee taxes will be ignored in this problem. Should they accept the offer? Which costs are sunk in this decision? Which costs are still relevant in this decision? Show your detailed calculations.
6. Continuing with the information above, FSSL is maxed out of its space with 10 enrollees per term. The state offered them an increased enrolment with 20 youths per term starting January 2023. If they accept this offer, they will have to hire 2 additional employees for $15 and $13.50 per hour respectively for 40 hours each week each hire plus the 1% costs of taxes and insurance as described in no. 5 above. Additionally, they have to rent the 1,000 square foot vacant space next door. The space will cost $4000 per month, and the utilities will cost $125 per month. 75% of the enrollees purchase the meal plan during the first quarter, 80% during the second quarter, 90% during the third quarter, and 100% during the fourth quarter. No additional tenant improvement will be required to use this space. Other cost information includes: the total insurance will now cost FSSL $5,000 per year, and the business license will now cost them double. Additionally, Red and Jake want to know how their finances will be affected by giving up the consulting business. As a cost accountant, prepare a letter to FSSL advising them on their space options. Should they accept or reject the offer? Justify your answer. Show your detailed calculations for each scenario whether to expand or not.
IN PACKAGING YOUR GROUP PRESENTATION – Prepare a comprehensive summary presentation to Red and Jake highlighting the current and future state of the business affair by identifying all the critical costs involved in the three scenarios, options to hire, purchase, increase enrollment, rent additional space, discontinue consulting division, etc., that need to be presented to FSSL. All your submission should be be in PPT. Also, EVERYONE SHOULD SUBMIT THEIR ASSIGNMENT IN BLACKBOARD.
Question 3: How did you get the variance from purchase option for the period?
And the monthly variance?
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