SUBJECT: Revenue and Expenditure Projection Assignment: Day Care Comes to Northville
This assignment presents you with an opportunity to apply what you have been learned to this
point, review program information, and come up with simple budgets based on known facts,
assumptions, and projections.
The subject of this assignment is the Day Care Comes to Northville case which follows this
memorandum. You will complete and submit Part 1 and selected components of Part 2 of the
case. (I have shaded in gray the sections of Part 2 that you will NOT be responsible for. This
case is challenging for most students, so I have decided to simplify it somewhat by striking some
sections of the case that may be especially challenging.)
You will prepare budgets as required by the case study. You will submit your base and adjusted budgets in Excel spreadsheet tables, identify all of your assumptions in developing the budgets, and write a one-page memorandum to Mayor Spark about the budgets you create – one memo for the Part 1 budget and one memo for the Part 2 budget.
I recommend that you first read through this assignment and then carefully read through Part 1
and the relevant section of Part 2 before you start working on your budgets. Be sure to identify
all the required elements and make sure that you address each. (You may want to make a
checklist for yourself as you read through the materials.)
In preparing your budget, begin by making a list of known information. For example, the
starting enrollment, enrollment growth, child/staff ratio, etc.) Then, identify all the assumptions
that you make and the basis for the assumptions. In this regard, keep in mind that you must
make certain assumptions when preparing a budget, even a simple budget like this. Information
is often incomplete and imperfect. Given that, it is important that each assumption: 1) be
reasonable given what is known, and 2) be clearly documented and explained.
The last page of the case mentions “effective tax rates.” As you will see, this case is about user
fees, not taxes, but the concept can still be applied. “Effective tax rate” is defined and discussed
on pages 135-136 of your text.
Day Care Comes to Northville assignment
Your memoranda should be formatted like this memorandum (single spaced, one blank space
between paragraphs, one-inch margins, 12 point type), in Word or a Word-compatible format,
and no more than one page in length. (The page limitation places a responsibility on you to
determine what is most important to communicate to the Mayor; be clear and concise.)
In grading this assignment, I will consider the following:
DAY CARE COMES TO NORTHVILLE
Northville, a medium-sized city in the midwestern part of the United States, has experienced a
significant change in the composition of its municipal work force of 1,800 employees.
Approximately thirty-five percent of the city employees are now female. In a recent survey of
city employees, over forty percent have said that “affordable day care for children” was
important to them. Meanwhile Director of the Office of Personnel Mary Lux has become
increasingly convinced that the lack of affordable day care is one of the main reasons for
absenteeism and lateness among city employees. Mayor Petula Spark, some of the members of
the city council, and the leader of the major city employees’ union, Denardo Legato, all agree
that something should be done. The question they are trying to answer is, what should it be?
Mayor Spark is in favor of doing something, in principle, but she is not in favor of incurring a
major new expense, given the many legitimate claims on the city’s already strained budget. She
has told Legato, who is negotiating the day care program on behalf of the city employees,
“We’ll give you space and utilities for a year at no cost. It is up to you to come up with a
suitable day care center that conforms to state and federal law.” Several regulatory mandates
and non-discrimination laws fall into this category. The only requirements specific to day care
centers are that (a) they be licensed and inspected once a year, (b) all new day care workers
take part in a three day state-certified training program and (c) the child/day care giver ratio be
no greater than 8 to 1. The annual inspection fee is $500. The total cost of the three-day
training program is estimated to be $200 per employee.
Mary Lux is responsible for planning the details of the day care program for the children of city
employees. With Mr. Legato’s approval, Ms. Lux has negotiated an arrangement with a local
non-profit agency that is already providing day care services in the Northville metropolitan area.
Tiny Tots, Inc. has three locations; the contract with the City of Northville would be a fourth
center. The Director of Tiny Tots, Klara Nemet, is enthusiastic about the prospects of a new
center specifically for city employees. While discussing the proposed arrangements with Ms.
Lux, Ms. Nemet said, “We will not need any additional administrative staff, since Ms. Perfekt,
my administrative secretary, and I could certainly handle the additional administrative work.”
Ms. Perfekt earns $1,300 a month. Ms. Nemet’s salary is $2,400 a month. Tiny Tots, Inc.
also must pay 7.15 percent of their salaries in the form of a social security contribution, 8
percent for unemployment and disability benefits; 6 percent of salaries goes to a pension fund,
and $60 per month for health benefits is paid for each of them. These fringe benefits apply to
all employees of Tiny Tots, Inc.
The additional details of the contract are as follows: the day care center will be open 20 days
every month. Parents pay a monthly fee based on an 8-hour day (9:00 a.m. to 5:00 p.m.).
Fees do not vary if less than a full day or less than a month of day care is used by the parents.
Based on projected demand, it is expected that the day care center will open in January 2000
with 120 children. Ms. Nemet has been successful in negotiating a ratio of 6 children to 1 day
care worker for the first year of operation.
Day care workers earn $6.50 per hour. They work from 9 to 5 and get paid for eight hours.
Children get a snack and lunch. The food cost is $3.00 per child per day. The cost of supplies
is $1.50 per child per day. The City of Northville has purchased certain equipment (such as
cots and desks) for the first 120 children. However, these costs are estimated to increase by
$50 per child as the enrollment at the day care center goes up. For the first four months, it is
expected that the number of children will grow by 10 percent, beginning in February 2000.
Beginning June 2000, the monthly growth is expected to be 5 percent.
Parents pay $200 per month per child. In the first year, Northville is “donating” space and
utilities. Ms. Lux says that this city contribution is worth $2,000 a month. Mr. Legato says that
the union will contribute to the cost of the city’s new day care center by providing $1.00 per
child per day for the children of union members. It is estimated that 70 percent of the children
will be children of union members. The state has a subsidized day care start-up grant for the
first year of operation. This grant is $90,000 a year.
DAY CARE COMPUTER EXERCISE, PART 1
You are a budget analyst in the Budget Office of the City of Northville. Mayor Spark just
asked you to “run some numbers” so that she can take a look at the arrangement that was just
negotiated between Ms. Lux, Mr. Legato, and Ms. Nemet. You should prepare the budget in a
spreadsheet. Since Mayor Spark may ask you some questions about the day care budget, you
should prepare the budget using parameters and as many formulas as possible. A well-designed
(and flexible) spreadsheet will simplify your task later.
Complete the following tasks and provide the tables and a brief one-page memo describing
1) Prepare the baseline 2000 monthly budget for the day care. (You can assume a calendar
year.) Determine the total surplus and deficit for each month.
2) Suppose the child/staff ratio were changed to the maximum allowed by law. What impact
would this have on the budget?
3) What would happen to the deficit if the enrollment increased by only 5 percent per month for
4) What other changes can be made to balance the budget? What are the advantages and
disadvantages of these changes? Produce a balanced budget and defend your choice of
DAY CARE COMPUTER EXERCISE, PART 2
It is now September of 2000, and the day care center has been successfully operating for 8
months. The demand for day care has been as strong as anticipated, with enrollment growing
by 5 percent per month and significant unmet demand. While most of the parameters used to
construct the 2000 budget were correct, there are a few adjustments which must be made to
personnel scheduling and other cost factors for 2001.
1) Tiny Tots, Inc. has started providing paid vacation/personal days to their employees. Day
care workers get 2 weeks of paid time, based on 40 hours per week.
2) In 2000, the budget did not include coverage for a lunch hour for each employee. As a
result, employees had to work during lunch; that violates union rules. This year, the staff will
be provided a one-hour paid lunch (they still get paid for 8 hours/day), and the director is
considering using part-time work study college students to cover the lunch hours. The
college students have to work at least 15 hours per week and will get paid at the going rate
for day care workers. Lunch hours are from 11 to 2, and employees can be assigned to any
lunch hour. (The objective is to schedule lunch hours for the staff to minimize staffing
3) Day care workers can work up to 9 hours per day, 40 hours per week, without being paid
overtime (time and a half). The personnel costs will rise to:
Wage: $7.0 per hour
Social Security: 7.5%
Health insurance: $100
4) In addition, the center has had to add liability insurance of $1,000 per month and fire and
theft insurance of $500 per month that will cover any services provided by the center.
5) All other costs are expected to increase by an inflation rate of 5 percent during 2001.
Besides the additional staffing requirements, Tiny Tots is thinking of adding additional services to
the day care center:
1) Expanded hours for the day care from 8:00 am to 6:00 pm. The children are expected to
come in two shifts;
— 8:00 am: 70 percent of children
— 10:00 am: 30 percent of children
2) Adding care for infants during these expanded hours. (They are expected to arrive in the
same percent for each time as toddlers.) The staffing ratio can be no higher than 3 infants to
1 staff person. The staff would receive the same pay and benefits as those taking care of
toddlers. Food and equipment costs are expected to be the same per child. The city will
subsidize equipment for the first 100 infants. The director expects to start in January 2001
with 100 infants and would like to maintain roughly a ratio of 3 toddlers for each infant in the
Presently, the day care center is housed in an old school that is not being used by the city.
While the city agreed to provide free space and utilities the first year, the mayor has said this will
not be possible for 2001. The city is willing to lease the full facility and provide utilities for
$2,000 per month. The school has 8,000 square feet, and state regulations require the
following square footage for children;
15 square feet/toddler
10 square feet/infant
ASSIGNMENT: Modify your spreadsheet from Part 1 to incorporate these changes. Save
your original version for Part 1 just in case! You can assume that the child/staff ratio for
toddlers will be maintained at 6/1. Carry out the following tasks and provide a copy of your
tables and a one-page memo summarizing your results:
1) Develop the 2001 budget by month with these changes. Determine the total expenditures
and expenditures per child. The director would like the budget broken into the two “mission
centers” and variable, step, and fixed costs* indicated. You should assign indirect costs* to
each mission center using the most appropriate allocation factor. (Justify your choice.)
Enrollment in the center could continue to grow by 5 percent per month as long as space is
available. Assume that the monthly rate is $300/month for childcare.
2) Assuming that the center receives subsidies of;
— $3/day/child for day care.
How much would daily fees to parents have to be to break even? Assume that:
（* See the assignment memorandum for guidance.）
grouped into three income classes:
Low income: average $15,000/year
Middle income: average $30,000/year
High income: average $50,000/year
and that city workers are evenly divided between these income classes. Assume that fees for
toddlers in a particular income class will be the same as infants in that class. Develop a sliding
scale fee that will cover the center’s deficits for 2001. Justify your choice of fee. (Hint:
Calculate effective tax rates*).
（* See the assignment memorandum for guidance.）
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