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Hawthorn Leisure Works (HLW) offers tennis courts and other physical fitness facilities to its members. The clubhas 2000 members. Revenue is derived...
Hawthorn Leisure Works (HLW) offers tennis courts and other physical fitness facilities to its members. The clubhas 2000 members. Revenue is derived from annual membership fees and hourly court fees. The annualmembership fees are:Individual $45Student 30Family 100Approximately half the members are 'family', and the remaining memberships are split equally betweenindividuals and students. For the next two financial years, the hourly court fees are $8 and $12, depending onthe season and the time of day (prime versus non-prime time). There are 10 courts at each club. The courts areavailable 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 90to 100 per cent of capacity during prime time (5 to 9 pm) and from 50 to 60 per cent of capacity during theremaining hours (9 am to 4 pm). Daily court usage during the off-season averages from only 20 to 40 per cent ofcapacity, and is charged at $6 per hour. All of HLW's memberships expire at the end of September. A substantialamount of the cash receipts is collected during the early part of the tennis season due to the renewal of annualmembership fees and heavy court usage. However, cash receipts are not as large in autumn and dropsignificantly in the winter months.For the start of the new financial year on 1 October, HLW is considering introducing a new membership and feestructure in an attempt to improve its cash flow planning. Under the new membership plan, only an annualmembership fee would be charged, rather than a membership fee plus hourly court fees. There would be twoclasses of membership, with annual fees as follows:Individual $300Family 500The annual fee would be collected in advance at the time the membership application was completed. Memberswould be allowed to use the tennis courts as often as they wished during the year under the new plan. All futurememberships would be sold under these new terms. A special promotional campaign would be instituted toattract new members and to encourage current members to remain with the club. The annual fees for individualand family memberships would be reduced to $250 and $450 respectively if members pay for their yearlymemberships in advance during the two-month promotional campaign.Hawthorn Leisure Works' management estimates that 70 per cent of the current members will continue with theclub, and student members would convert to individual membership. The most active members (45 per cent ofthe current members) would pay the yearly fee in advance and receive the special fee reduction, while theremaining members who continued would renew memberships in October. Those members who would not rejoinare not considered active (that is, they play five times or less during the year). Management estimates that theloss of members would be offset fully by new members within six months of instituting the new plan. These new 6members would pay a proportional amount of the yearly fee on joining. Furthermore, many of the new memberswould be individuals who would play during non-prime time. Management estimates that adequate court time willbe 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 Augustand 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'smanaging 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 youranswer.2 Estimate the effect on sales revenue resulting from the planned change in fee structure for the next financialyear, 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 itdecides 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 andfee structure are adopted.
