Question

City Racquetball Club (CRC) offers racquetball and other physical fitness facilities to its members. There are four of these clubs in the metropolitan area. Each club has between 1,800 and 2,500 members. Revenue is derived from annual membership fees and hourly court fees. The annual membership fees are as follows: Individual $ 40 Student $25 Family $95 The hourly court fees vary from $6 to $10 depending upon the season and the time of day (prime versus nonprime time). The peak racquetball season is considered to run from September through April. During this period, court usage averages 90 to 100 percent of capacity during prime time (5:00–9:00 p.m.) and 50 to 60 percent of capacity during the remaining hours. Daily court usage during the off-season (i.e., summer) averages only 20 to 40 percent of capacity. Most of CRC’s memberships have September expirations. A substantial amount of the cash receipts are collected during the early part of the racquetball season due to the renewal of the annual membership fees and heavy court usage. However, cash receipts are not as large in the spring and drop significantly in the summer months. CRC is considering changing its membership and fee structure in an attempt to change its cash receipts. Under the new membership plan, only an annual membership fee would be charged, rather than a membership fee plus hourly court fees. There would be two classes of membership as follows: Individual $250 Family $400 The annual fee would be collected in advance at the time the membership application is completed. Members would be allowed to use the racquetball courts as often as they wish during the year under the new plan. All future memberships would be sold under these new terms. Current memberships would be honored on the old basis until they expire. However, a special promotional campaign would be instituted to attract new members and to encourage current members to convert to the new membership plan immediately. The annual fees for individual and family memberships would be reduced to $200 and $300, respectively, during the two-month promotional campaign. In addition, all memberships sold or renewed during this period would be for 15 months rather than the normal one-year period. Current members also would be given a credit toward the annual fee for the unexpired portion of their membership fee, and for all prepaid hourly court fees for league play that have not yet been used. CRC’s management estimates that 60 to 70 percent of the present membership would continue with the club. The most active members (45 percent of the present membership) would convert immediately to the new plan, while the remaining members who continue would wait until their current memberships expire. Those members who would not continue are not considered active (i.e., they play five or fewer times during the year). Management estimates that the loss of members would be offset fully by new members within six months of instituting the new plan. Furthermore, many of the new members would be individuals who would play during the nonprime time. Management estimates that adequate court time will be available for all members under the new plan. If the new membership plan is adopted, it would be instituted on February 1, well before the summer season. The special promotional campaign would be conducted during March and April. Once the plan is implemented, annual renewal of memberships and payment of fees would take place as each individual or family membership expires. ​ ​ ​​ Your consulting firm has been hired to help CRC evaluate its new fee structure. Write a letter to the club’s president answering the following questions. 1. Will City Racquetball Club’s new membership plan and fee structure improve its ability to plan its cash receipts? Explain your answer. 2. City Racquetball Club should evaluate the new membership plan and fee structure completely before it decides to adopt or reject it. a) Identify the key factors that CRC should consider in its evaluation. b) Explain what type of financial analyses CRC should prepare in order to make a complete evaluation. 3 Explain how City Racquetball Club’s cash management would differ from the present if the new membership plan and fee structure were adopted. EXCEL SHEET

Answer 1

According to the question,

1. In the present case, the club is deriving its revenue from two sources, that is annual membership fees and hourly court fees. Under the current plan, the hourly court fees is not a fixed component, it would variate year to year based upon the utilization Under the clubs new proposed membership plan, only annual membership fees would be charged and that would be fixed and there would be no hourly court fees and hence the club would be able to easily plan its cash receipts as there is only a single revenue source which is fixed and would be collected in advance. This will enable better planning in terms of cash receipts

2. a. Following factors should be considered before implementing the new system Acceptance of the revised price for membership and proposal - How well the member would react to the new membership plan as they membership fees has been increased many folds. All members may be give this new plan a very welcoming treatment. This would totally depend of how much old members on individual basis were spending on hourly court fees and the acceptance would differ on individual basis. Additional Cost to be incurred to implement the system - The implementation of the plan might incur further additional costs which must be brought into consideration. The cost of campaign should not exceed the benefit to be derived from the implementation of the new membership plan.

b. The first and foremost financial statement that CRC should prepare is a cash receipt and a cash payment budget. Further, CRC should be a budgeted receipt and payment account or income statement. Further, budgets for anticipated funding shall be prepared.

3. On implementation of the new cash receipt system, cash planning can be done more accurately since there is more sanctity as to the cash receipts as membership fees would be fixed and received in advance. The will be better cash management as the management would know how much the total cash receipts for the complete year are, as there wont be any variable component involved and consequently cash payment can be planned in a better manner