Hawthorn Leisure Works (HLW) offers tennis courts and other physical fitness fac

Question

Hawthorn Leisure Works (HLW) offers tennis courts and other physical fitness facilities to its members. The club has 2000 members. Revenue is derived from annual membership fees and hourly court fees. The annual membership fees are: Individual $45, Student 30, Family 100. Approximately half the members are 'family', and the remaining memberships are split equally between individuals and students. For the next two financial years, the hourly court fees are $8 and $12, depending on the season and the time of day (prime versus non-prime time). There are 10 courts at each club. The courts are available for 12 hours per day, from 9 am to 9 pm. The peak tennis season runs from October to April (181 days). During this period, court usage averages from 90 to 100 per cent of capacity during prime time (5 to 9 pm) and from 50 to 60 per cent of capacity during the remaining hours (9 am to 4 pm). Daily court usage during the off-season averages from only 20 to 40 per cent of capacity, and is charged at $6 per hour. All of HLW's memberships expire at the end of September. A substantial amount of the cash receipts is collected during the early part of the tennis season due to the renewal of annual membership fees and heavy court usage. However, cash receipts are not as large in autumn and drop significantly in the winter months. For the start of the new financial year on 1 October, HLW is considering introducing a new membership and fee structure in an attempt to improve its cash flow planning. 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, with annual fees as follows: Individual $300, Family 500. The annual fee would be collected in advance at the time the membership application was completed. Members would be allowed to use the tennis courts as often as they wished during the year under the new plan. All future memberships would be sold under these new terms. A special promotional campaign would be instituted to attract new members and to encourage current members to remain with the club. The annual fees for individual and family memberships would be reduced to $250 and $450 respectively if members pay for their yearly memberships in advance during the two-month promotional campaign. Hawthorn Leisure Works' management estimates that 70 per cent of the current members will continue with the club, and student members would convert to individual membership. The most active members (45 per cent of the current members) would pay the yearly fee in advance and receive the special fee reduction, while the remaining members who continued would renew memberships in October. Those members who would not rejoin are not considered active (that is, they play five times or less 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. These new 5 members would pay a proportional amount of the yearly fee on joining. Furthermore, many of the newmembers would be individuals who would play during non-prime 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 at the start of the new financial year (1 October), which is the start of the tennis season. The special promotional campaign would be conducted during August and September, prior to the start of the new financial year. Required: Your consulting firm has been hired to help HLW to evaluate its new fee structure. Write a letter to the club's managing director dealing with the following issues: 1 Will HLW's new membership plan and fee structure improve its ability to plan its cash receipts? Explain your answer. 2 Estimate the effect on sales revenue resulting from the planned change in fee structure for the next financial year, which starts 1 October and ends on 30 September. State any assumptions that you need to make. 3 Hawthorn Leisure Works should evaluate the new membership plan and fee structure completely before it decides to adopt or reject it. (a) Identify the key factors that HLW should consider in its evaluation. (b) Explain what type of financial analyses HLW should prepare in order to make a complete evaluation. 4 Explain how HLW's cash management practices may differ from the present if the new membership plan and fee structure are adopted.

Explanation / Answer

Solution:

Part 1. Yes, HLW's new membership plan and fee structure would certainly improve its ability to plan its cash receipts. In the present situation there are two sources of revenue available to HLW i.e., annual memberships and court fee. In two of them court fee is dependent on the usage of the court which may vary at times. But the membership is one time income and thus it is certain. Therefore if new plan is adopted then only annual membership shall be the source which would be certain and would facilitate better planning of cash receipts.

Part 2. Calculation of revenues under both the plans:

Exisiting plan:

Membership income:

Individual members (2000*25%*$45) = $22500

Student members (2000*25%*$30) = $15000

Family members (2000*50%*$100)= $100000

Total (22500+15000+100000)= $137500

Court fee income: There are 10 courts in total so the income will be total of all.

During peak season (181 days)

Prime hours (4 hours * 10 * 95% * $12 * 181 days) = $82536

Non prime hours (8 hours * 10 * 55% * $8 * 181 days) = $63712

During non peak season (184 days)

(12 hours * 10 * 30% * $6 * 184 days) = $39744

Total court fee (82536+63712+39744) = $185992

Total Revenue under existing plan ($137500+$185992)= $323492

Calulation of revenue under proposed plan:

Under promotional campaign

Individual (1000 * 45% * $250) = $112500

Family (1000 * 45% * $450) = $202500

After promotions

Individual (1000 * 25% * $300) = $75000

Family (1000 * 25% * $500) = $125000

Total proposed revenue (112500+202500+75000+125000) = $515000

Therefore the revenue shall increase by $191508.

**We have assumed that the percentage of continuing members is same for each class of membership.

Part 3.

Sub part (a): Key factors to be considered in evalution

*Number of members who shall continue under new plan.

*Proposed memberships under the new plan.

*Availability of court for the members for peak and non peak seasons.

*Utilisation of court capacity in prime and non prime hours.

Sub part (b): In order to evaluate the proposal completely HLW should compare the revenues under both the plans. Further cash inflows and outflows and frequency thereof should also be checked.

Part 4. Since under the present plan HLW is getting cash all round the year (in form of court fee) there would be a consistent inflow and ouflow of cash. But if new plan is adopted then the scene would be different. There would not be any regular inflow of cash and heavy cash inflow would occur at the time of membership renewals. Therefore HLW is required to invest its extra cash in productive areas so that it can be used whwn needed.

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