Question

Individual.............................................................................................$ 40Student................................................................................................25Family..................................................................................................95 Cases City Racquetball Club (CRC) offers racquetball and otherphysical fitness facilities to its members. There are four of theseclubs in the metropolitan area. Each club has between 1,800 and2,500 members. Revenue is derived from annual membership fees andhourly court fees. The annual membership fees are as follows: ■Case 9–45 Using Budgets to Evaluate Business Decisions (LO 9-2,9-3, 9-7) The hourly court fees vary from $6 to $10 depending uponthe season and the time of day (prime versus nonprime time). Thepeak racquetball season is considered to run from September throughApril. During this period, court usage averages 90 to 100 percentof capacity during prime time (5:00–9:00 p.m.) and 50 to 60 percentof capacity during the remaining hours. Daily court usage duringthe off-season (i.e., summer) averages only 20 to 40 percent ofcapacity. 20x1 January February March 1st Quarter Cash receipts(from schedule 2)............................................................. Less:Cash disbursements (from schedule 4)......................................... Change in cash balanceduring period due to operations..................... Sale ofmarketable securities (1/2/x1).................................................... Proceeds frombank loan (1/2/x1).......................................................... Purchaseof equipment...........................................................................Repayment of bank loan (3/31/x1)......................................................... Intereston bank loan..............................................................................Payment of dividends..............................................................................Change in cash balance during first quarter.......................................... Cash balance, 1/1/x1..............................................................................Cash balance, 3/31/x1............................................................................412 Chapter 9 Financial Planning and Analysis: The Master BudgetMost of CRC’s memberships have September expirations. A substantialamount of the cash receipts are collected during the early part ofthe racquetball season due to the renewal of the annual membershipfees and heavy court usage. However, cash receipts are not as largein the spring and drop significantly in the summer months. CRC isconsidering changing its membership and fee structure in an attemptto change its cash receipts. Under the new membership plan, only anannual membership fee would be charged, rather than a membershipfee plus hourly court fees. There would be two classes ofmembership as follows: Individual.............................................................................................................$250 Family..................................................................................................................400 The annual fee would be collected in advance at the time themembership application is completed. Members would be allowed touse the racquetball courts as often as they wish during the yearunder the new plan. All future memberships would be sold underthese new terms. Current memberships would be honored on the oldbasis until they expire. However, a special promotional campaignwould be instituted to attract new members and to encourage currentmembers to convert to the new membership plan immediately. Theannual fees for individual and family memberships would be reducedto $200 and $300, respectively, during the two-month promotionalcampaign. In addition, all memberships sold or renewed during thisperiod would be for 15 months rather than the normal one-yearperiod. Current members also would be given a credit toward theannual fee for the unexpired portion of their membership fee, andfor all prepaid hourly court fees for league play that have not yetbeen used. CRC’s management estimates that 60 to 70 percent of thepresent membership would continue with the club. The most activemembers (45 percent of the present membership) would convertimmediately to the new plan, while the remaining members whocontinue would wait until their current memberships expire. Thosemembers who would not continue are not considered active (i.e.,they play five or less times during the year). Management estimatesthat the loss of members would be offset fully by new memberswithin six months of instituting the new plan. Furthermore, many ofthe new members would be individuals who would play during nonprimetime. Management estimates that adequate court time will beavailable for all members under the new plan. If the new membershipplan is adopted, it would be instituted on February 1, well beforethe summer season. The special promotional campaign would beconducted during March and April. Once the plan is implemented,annual renewal of memberships and payment of fees would take placeas each individual or family membership expires. Required: Yourconsulting firm has been hired to help CRC evaluate its new feestructure. Write a letter to the club’s president answering thefollowing questions. 1. Will City Racquetball Club’s new membershipplan and fee structure improve its ability to plan its cashreceipts? Explain your answer. 2. City Racquetball Club shouldevaluate the new membership plan and fee structure completelybefore it decides to adopt or reject it. a. Identify the keyfactors that CRC should consider in its evaluation. b. Explain whattype of financial analyses CRC should prepare in order to make acomplete evaluation. 3. Explain how City Racquetball Club’s cashmanage