[Solution]Budgeting: Using Budgets to Evaluate Business Decisions

Assessment Task (Budgeting) (10 Marks) Using Budgets to Evaluate Business Decisions: Hawthorn Leisure Works (HLW) offers tennis courts and other physical fitness facilities to its…

Assessment Task (Budgeting) (10 Marks) Using Budgets to Evaluate Business Decisions: 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 the day (prime versus non-prime time). There are 10 courts each club. The courts are available for 12 hours per day, from 9am to 9pm. 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 (5pm to 9pm) and 50 to 60 per cent of capacity during the remaining hours (9am to 4pm). Daily court usage during the off season averages from 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 cash receipts is collected during the early part of the tennis season due to 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. HLW’s management estimate that 70% of the current members will continue with the club and student members would convert to individual membership. The most active members (45% of 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 could not re-join are not considered active (that is, they five times or less than a 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 members would pay a proportional amount of the yearly fee on joining. Furthermore, many of the new members would be individuals would pay during non-prime time. Management estimates the 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 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. Explain the following issues to report to your managing director: a) Will HLW’s new membership plan and fee structure improve its ability to plan its cash receipts? Explain. (2marks) b) 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. (5marks) c) HLW should evaluate the new membership plan and fee structure completely before it decides to adopt or reject it. Identify the key factors that HLW should consider in its evaluation. (3marks
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