Question

Case 9–45 Using Budgets to Evaluate Business Decisions (LO 9-2, 9-3, 9-7) CasesCity 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., sum-mer) 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 less 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 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.

Required: 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.

Answer 1

1.

Answer:-Yes, City Racquetball Club’s new membership plan, and fee structure will improve its ability to plan cash receipts because under this plan there will be an annual membership fee with fixed charges where the participants should pay expenses and other appropriate fees well advance in time. The mode of continuous payment is removed since the payment is charged hourly and not fixed as it varies depending upon the season and time. Thus the new plan makes perfect cash management as they collect the cash in advance and a single revenue source which makes it easier to plan its cash receipts

2.

a)

Answer:- The key factors that CRC should consider in its evaluation are:-

1)Try to check and find out any additional costs that will be imposed to implement the new plan. These costs involved should not exceed the benefits that will be obtained from the new membership plan.

2) As it is a one-time installment there can be a decrease in the number of parts. This differs on the individual basis and how much they were spending on hourly fees.

b)

Answer:- They type of financial analysis CRC should prepare in order to make a complete evaluation are

1. The forecast of the cash inflows and the outflows they get over a specified period of time.
2. Prepare a cash receipt and cash payment budget.

3.

Answer:- With the adoption of a new membership plan and fee structure, cash management can be done more precisely because as mentioned the participant must make the payment in advance by doing so they will be ready with the money plan and this can be useful for the implementation of new strategy since effective cash management will be required. But this is not so in hourly fee as it keeps on fluctuating and not provide accurate cash receipts.