Future Focus
Future Focus (FF) had been running a small, for-profit preschool program for young children between the ages of two and four for several decades. FF was one of several privately run programs in the suburban Boston area. For each of the three age groups (i.e., two-, three- and fouryear olds), there were two classes per day for a total of six classes in the facility each day. The classes were held both in the morning and in the afternoon, five days a week between September and June; there were approximately 200 days (40 weeks), or 1,200 class meetings, per year. Only about onethird of FF's local competitors offered classes during the summer months. The morning classes ran from 9:00 a.m. to noon, and the afternoon meetings ran from 1:00 p.m. to 4:00 p.m. Lunch was not served in either class. However, each class served a snack to the children. Class size varied from nine to 15 students per class. Although there was a lot of pressure from parents to reduce class sizes, a recent article in an industry newsletter showed that, given current demographics, the market for such programs could increase by 10% a year for the next five years. The year before, a parent suggested that the school begin hosting birthday parties on the weekend. Since FF's three classrooms were empty during this time, it seemed like a good use of the space and could generate additional revenue. Over the past year, the school had managed to quickly build a sizable side business hosting birthday parties. Approximately 150 parties were held in the school's three classrooms on Saturdays and Sundays throughout the year. The parties were typically attended by 10-20 children and ran for approximately four hours. The four-hour running time included the time necessary to set up and clean up the facility. For this service, the school's main competitors consisted of children's gyms, arts and crafts stores, and museums. Each had been offering specialized birthday parties for many years and charged very high prices. As a result, FF was able to significantly under-price these other firms while maintaining a very high profit margin. In fact, due to the success of the birthday parties over the past year, FF wanted to expand this business. FF was considering switching the bulk of its advertising campaign from one that was designed to build general awareness of the school to one that was specifically directed at promoting the birthday party business.

Current Cost System
FF's largest expense was related to the building (Exhibit 1 for an income statement). FF had initially purchased a single-family home and converted it to a daycare/schoolhouse setting. The house cost $400,000, including $50,000 for the necessary renovations and license applications. Building-related expenses included depreciation, utilities, maintenance, cleaning, property taxes, and so forth. Traditionally, these costs were assigned to the classes on a per class-meeting basis. The buildingrelated costs had not significantly changed since the introduction of the birthday party business. Therefore, no building-related costs had been assigned to the new product. Salaries, supplies, and food were also allocated based on the meeting, where a meeting was either a single class meeting for three hours or a single birthday party for four hours. The actual cost of supplies and food for all of last year's birthday parties was $3,000; the actual cost for the preschool classes was approximately $18,000. FF had five employees—three full time and two part time. The

school's director earned $50,000, taught two of the preschool classes each day, and administered both the preschool and the birthday party programs. She spent approximately 20% of her time in administration, evenly split between the two programs. The remaining two full-time employees earned $20,000 per year and taught the other four preschool classes. Finally, FF had hired two part-time employees to run the birthday parties on weekends, and each earned $5,000 per year. The director had approximately 20 years of daycare and teaching experience, the full-time teachers each had approximately five years of teaching experience, and the part-time employees were college students majoring in child development or education. As advertising was used to build awareness of FF's presence in the community and affected both products, it was not allocated to either product.

Pricing
FF charged $200 for each birthday party, regardless of how many children attended, and averaged a total of about $270 for each preschool class session, depending on the number of students in the class. This was an increase over fiscal-year 2003, when preschool charges totaled only $240 per class session, even though average class size declined from 12 to 10 students. Each year, FF management prepared a budget for the next year that was exactly equal to the prior year's actual results.

Further Changes
Currently, the children's day was split up between a two-hour core class and a one-hour elective. The elective aimed to bring new ideas and teaching styles into the classroom. However, FF believed that its core competency lay in delivering a solid, core class to the children. This method had been successful in preparing children for the move to kindergarten. Additionally, the elective had not been successful as an experimental setting to test new teaching styles and ideas; in fact, the elective had become merely an extension of the core class. Consequently, FF planned to abolish the elective class and only offer the standard, core class. Additionally, FF was considering purchasing a neighborhood school. As part of the expansion, FF's director would have more administrative responsibility. She had hired another teacher to over her classes as well as two administrative assistants to help with the daily operations of FF. Exhibit 1 Revenue Building Related Salaries Supplies and Food Advertising Net profit Income Statement for Year Ended June 30, 2002 $354,000 $216,000 100,000 21,000 10,000 $ 7,000

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