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The purpose of this memo is to present findings related to the financial feasibility of this project based on the financial information provided by the organization. The aim of this analysis is to use Cost-Volume-Profit (CVP) tool for determining the impact of the change in the number of students on the organization’s operating profit. The analysis is also supported by a descriptive review of the information provided by the organization regarding the project. The key areas of concern that could influence the organization’ ability to achieve self-sufficiency for this project are also highlighted. Furthermore, the memo provides certain recommendations regarding the costs involved in the project and ways that could help the company to improve its break-even level.
Project Benefits
Alta Vista Day Care Center Project by Volunteers of America (VOA) has utmost significance in the community building as it adds new dimensions to the improvement of human life. It will address problems of a low-income residential community of Alta Vista Gardens. The project requires careful planning and effective strategies that could help it become self-sufficient and financially stable to continue its operations in the long run.
Project Challenges and Uncertainties
The company faces uncertainties regarding the number of students enrolling at the center and costs that it has to incur even with no registration. These uncertainties can be addressed by analyzing the financial information including forecasted revenues, variable costs, and fixed costs for different level of activity that is measured by the number of students expected by the organization to enroll at Alta Vista Day Care Center.
CVP Analysis and Assessment
It should be understood that fixed costs do not change with the variation in the number of children. Therefore, it is not possible for the organization to reduce these costs by increasing the level of activity. On the other hand, variable costs change as the number of children enrolled at the center affects them. The organization has a control over variable costs, and it can manage them to reduce the total costs of the project. However, the cost structure needs to be evaluated on the basis of the financial information provided by the organization. The proportion of fixed costs and variables costs affect the organization’s capability to reduce and manage its costs effectively.
The organization’s operating profit is calculated after deducting all costs from its revenue. The organization is seeking ways to generate sufficient revenue to cover its costs and remain profitable. Therefore, it would be useful to carry out an analysis of cost, volume, and profit of the organization. The break even level is calculated by using the following formula.
Break-Even Level = Fixed Costs / Weighted Contribution Margin
The contribution margin is calculated by deducting variable costs from the organization’s revenue. The weighted contribution margin is calculated by dividing the contribution margin by the number of children. The break-even level is determined as the number of students that the center needs to get enrolled to cover its fixed costs. The break-level approach is part of CVP analysis that has been performed to investigate the relationship between cost, volume, and profit.
The analysis uses CVP tool to identify and evaluate the sensitiveness of the financial performance of Alta Vista Day Care Center. The sensitivity of the projected financial performance is subject to the number of children who are expected to attend each month. CVP allows a situational analysis based on the values of determinants considered for the analysis. In this case, it is the number of children to be registered by VOA.
The financial information attached to this memo indicates four different situations that vary according to the number of children. The total number of students considered is 20, 25, 30, and 37 in different levels of activity. The information clearly indicates that the organization has a low margin of safety. The reason is that the organization may not a large number of children enrolled at the center, and a reduction in the number of children could severely affect its ability to reach the break-even level.
The analysis of costs indicates that the majority of costs are not fixed, and they do not change with changes in the level of activity. The variable costs include educational supplies, recreational supplies, housekeeping supplies, and administrative expense that vary according to the number of children.
The review highlights that there are few variables costs that are not considered in the preparation of financial projections. These may include sales and marketing expenses. The center will incur marketing expenses to promote and communicate with parents and other local bodies regarding its services.
The major concern is that Alta Vista Day Care Center will incur an operating loss if there are 20 25, or 30 students enrolled at the center. It will only generate an operating profit of $111 when there would be 35 students at the center. The results suggest that the organization will break even at the lowest level of activity with 22 students.
The break-even level increases with the increase in the number of students. At 25-students level, the break-even point is 29 students, at 30-students level, it is 33 students, and at the highest level of activity, it is 36 students. It implies that the organization needs to control its variable costs that show an increasing trend. The analysis points out that the organization will incur loss unless it reaches the highest level of activity.
Another source of concern is that the fixed costs of operations are very high, and it is not possible to cover these costs with a low number of students at the center. There are fewer opportunities for the organization to attain the break-even level. The examination of fixed costs indicates that the largest proportion of fixed costs constitutes of the salaries of administrative and operating employees. These costs cannot be avoided as the organization needs to have a minimum staff to ensure that all activities of the center can take place when they are required.
Furthermore, there are various other administrative costs that the organization will incur. The aggregate amount of these costs is significant and fixed. The objective of the organization to have financial self-sufficiency is not achievable with its fixed costs. The organization needs to obtain additional funds to cover its costs initially.
The center can access alternative sources of funds such as local businesses, grantors, financial support groups, and other community organizations to raise additional capital. The management can also request these entities to support the center on a continuous basis to meet its operational fund requirement. The role of VOA is also important in this respect. It has to ensure that the center manages the uncertainties effectively and has access to external funding whenever it is needed.
The analysis also indicates that the management expects children of age groups 2-3-year-olds and 4-5-year-olds to be largely enrolled at Alta Vista Day Care Center. The lowest number expected by the management is of children belonging to the age group of five-year-olds. Moreover, it is observed the number of five-year-olds remains constant at each level of activity. It could be drawn from the financial information that the organization could generate more revenue by targeting children of this age group. The organization should take specific measures to communicate with the parents of five-year-olds and convince them to have their children enrolled at the center. It would increase the organization’s revenue and assist it to attain break even at a low level of activity.
The management must realize that if the center has a high proportion of children from the age group of five-year-olds as compared to the other two groups, then it may not achieve the break-even level. The reason is the low-price charged to parents of 5-year-olds. The center must improve its approach to reach 2-3-year-olds and 4-5-year-olds groups to increase the number of children enrolled at the center. Moreover, the organization should work on ensuring maximum attendance of students to achieve the highest level of activity.
The analysis performed uses an alternative approach to determining the break-even level. It has been observed that administrative expenses are estimated to be 14% of the total revenue. It is a substantial amount included in the variable costs that has a direct impact on its contribution margin. However, the management needs to understand that administrative expenses can be eliminated if the VOA office offers free registration in the first year. The mission statement of VOA supports the decision as it aims to help individuals realize their potential. Therefore, it would be useful to determine the break-even level by excluding these costs. If administrative expenses are excluded from variable costs, then it could be noted that the contribution margin is higher than the previous estimation. The break-even level for each level of activity can be achieved with less number of students. The break-even level corresponds with the number of children considered at each level of activity.
Recommendations
It could be predicted that Alta Vista Day Care Center Project could play an important role in the community service. It will be a success as there is a lot of demand for human service by community members. The board of Alta Vista Day Care Center Project needs to build strategies to form close relationships with members of the Alta Vista community to ensure that it could maximize the number of children enrolled at the center. Furthermore, the center should develop strategies that would ensure attendance of students. The center has to provide high-quality services to build its reputation in the community. The management needs to understand that it can attract parents by addressing their concerns. Therefore, the center should develop strong, informative communication channels to communicate with parents. Moreover, it is noted that the center may not be able to generate an operating loss in the beginning. The center needs to establish a line of credit or funds to meet its fund requirement. It could be stated that if the center considers these recommendations and take initiatives to support high enrollment of children, then it can achieve self-sufficiency and continue to operate successfully in the long-term.
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