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.

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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.

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Answer 1

Q1)
Basically if City Racquetball Club were to move away from charging both memberships and hourly court rates they would be more able to employ cash planning. This is because the concept of hourly court rates is a completely variable earning and is ever more so variable because they charge different rates for different times. While the memberships will not be fixed, they will be able to better determine how much of a revenue will be coming in. The increase of the membership fees will also help to offset any losses experienced from the removal of the hourly court fees.

Q2)
a.
In my opinion there are two factors that are going to need to be considered when deciding on whether or not to adopt the fee structure. The first being that there needs to be some research done to see if there will be any additional costs associated with the new structuring. These new costs could either come from the implementation stage its self or the loss of revenue from hourly rates or loss of memberships.
The second important aspect that needs to be considered is that the new prices need to be both proposed and approved before they would be able to move forward. The last thing that the club would want to do is increase the prices and drive away members.  

b.
Operating Expense Budget – A revenue calculation of probable income and expenses for a set time period.
Return On Investment – This should be used if there will be any investments made on conjunction with the changes of membership pricing.
Income Statement – A revenue calculation of probable income and expenses for a set time period

Q3)
Perhaps the most important aspect from this structure is that the organization is going to be able to better understand how much revenue is coming in and how much is expected to come in. This will do a number of things for them such as being able to make much more educated decisions on budgets and investments. The price of the court per hour is clearly an issue for the organization because it is constantly fluctuating and never a sure thing. I personally believe that the solidification of the revenue stream will ultimately help the club in not only the short term but also the long term.