Hawthorn Leisure Works (HLW) offers tennis courts and otherphysical fitness facilities to its members. The club has 2000members. Revenue is derived from annual membership fees and hourlycourt fees. The annual membership fees are: Individual $45, Student 30, Family 100.Approximately half the members are 'family', and the remainingmemberships are split equally between individuals and students. Forthe next two financial years, the hourly court fees are $8 and $12,depending on the season and the time of day (prime versus non-primetime). There are 10 courts at each club. The courts are availablefor 12 hours per day, from 9 am to 9 pm. The peak tennis seasonruns from October to April (181 days). During this period, courtusage averages from 90 to 100 per cent of capacity during primetime (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 theoff-season averages from only 20 to 40 per cent of capacity, and ischarged at $6 per hour. All of HLW's memberships expire at the endof September. A substantial amount of the cash receipts iscollected during the early part of the tennis season due to therenewal of annual membership fees and heavy court usage. However,cash receipts are not as large in autumn and drop significantly inthe winter months. For the start of the new financial year on 1October, HLW is considering introducing a new membership and feestructure in an attempt to improve its cash flow planning. Underthe new membership plan, only an annual membership fee would becharged, rather than a membership fee plus hourly court fees. Therewould be two classes of membership, with annual fees as follows:Individual $300, Family 500. The annual fee would be collected inadvance at the time the membership application was completed.Members would be allowed to use the tennis courts as often as theywished during the year under the new plan. All future membershipswould be sold under these new terms. A special promotional campaignwould be instituted to attract new members and to encourage currentmembers to remain with the club. The annual fees for individual andfamily memberships would be reduced to $250 and $450 respectivelyif members pay for their yearly memberships in advance during thetwo-month promotional campaign. Hawthorn Leisure Works' managementestimates that 70 per cent of the current members will continuewith the club, and student members would convert to individualmembership. The most active members (45 per cent of the currentmembers) would pay the yearly fee in advance and receive thespecial fee reduction, while the remaining members who continuedwould renew memberships in October. Those members who would notrejoin are not considered active (that is, they play five times orless during the year). Management estimates that the loss ofmembers would be offset fully by new members within six months ofinstituting the new plan. These new 5 members would pay aproportional amount of the yearly fee on joining. Furthermore, manyof the newmembers would be individuals who would play duringnon-prime time. Management estimates that adequate court time willbe available for all members under the new plan. If the newmembership plan is adopted, it would be instituted at the start ofthe new financial year (1 October), which is the start of thetennis season. The special promotional campaign would be conductedduring August and September, prior to the start of the newfinancial year. Required: Your consulting firm has been hired tohelp HLW to evaluate its new fee structure. Write a letter to theclub's managing director dealing with the following issues: 1 WillHLW's new membership plan and fee structure improve its ability toplan its cash receipts? Explain your answer. 2 Estimate the effecton sales revenue resulting from the planned change in fee structurefor the next financial year, which starts 1 October and ends on 30September. State any assumptions that you need to make. 3 HawthornLeisure Works should evaluate the new membership plan and feestructure completely before it decides to adopt or reject it. (a)Identify the key factors that HLW should consider in itsevaluation. (b) Explain what type of financial analyses HLW shouldprepare in order to make a complete evaluation. 4 Explain how HLW'scash management practices may differ from the present if the newmembership plan and fee structure are adopted.
Hawthorn Leisure Works (HLW) offers tennis courts and otherphysical fitness facilities to its members. The club has 2000members. Revenue is derived from annual membership fees and hourlycourt fees. The annual membership fees are: Individual $45, Student 30, Family 100.Approximately half the members are 'family', and the remainingmemberships are split equally between individuals and students. Forthe next two financial years, the hourly court fees are $8 and $12,depending on the season and the time of day (prime versus non-primetime). There are 10 courts at each club. The courts are availablefor 12 hours per day, from 9 am to 9 pm. The peak tennis seasonruns from October to April (181 days). During this period, courtusage averages from 90 to 100 per cent of capacity during primetime (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 theoff-season averages from only 20 to 40 per cent of capacity, and ischarged at $6 per hour. All of HLW's memberships expire at the endof September. A substantial amount of the cash receipts iscollected during the early part of the tennis season due to therenewal of annual membership fees and heavy court usage. However,cash receipts are not as large in autumn and drop significantly inthe winter months. For the start of the new financial year on 1October, HLW is considering introducing a new membership and feestructure in an attempt to improve its cash flow planning. Underthe new membership plan, only an annual membership fee would becharged, rather than a membership fee plus hourly court fees. Therewould be two classes of membership, with annual fees as follows:Individual $300, Family 500. The annual fee would be collected inadvance at the time the membership application was completed.Members would be allowed to use the tennis courts as often as theywished during the year under the new plan. All future membershipswould be sold under these new terms. A special promotional campaignwould be instituted to attract new members and to encourage currentmembers to remain with the club. The annual fees for individual andfamily memberships would be reduced to $250 and $450 respectivelyif members pay for their yearly memberships in advance during thetwo-month promotional campaign. Hawthorn Leisure Works' managementestimates that 70 per cent of the current members will continuewith the club, and student members would convert to individualmembership. The most active members (45 per cent of the currentmembers) would pay the yearly fee in advance and receive thespecial fee reduction, while the remaining members who continuedwould renew memberships in October. Those members who would notrejoin are not considered active (that is, they play five times orless during the year). Management estimates that the loss ofmembers would be offset fully by new members within six months ofinstituting the new plan. These new 5 members would pay aproportional amount of the yearly fee on joining. Furthermore, manyof the newmembers would be individuals who would play duringnon-prime time. Management estimates that adequate court time willbe available for all members under the new plan. If the newmembership plan is adopted, it would be instituted at the start ofthe new financial year (1 October), which is the start of thetennis season. The special promotional campaign would be conductedduring August and September, prior to the start of the newfinancial year. Required: Your consulting firm has been hired tohelp HLW to evaluate its new fee structure. Write a letter to theclub's managing director dealing with the following issues: 1 WillHLW's new membership plan and fee structure improve its ability toplan its cash receipts? Explain your answer. 2 Estimate the effecton sales revenue resulting from the planned change in fee structurefor the next financial year, which starts 1 October and ends on 30September. State any assumptions that you need to make. 3 HawthornLeisure Works should evaluate the new membership plan and feestructure completely before it decides to adopt or reject it. (a)Identify the key factors that HLW should consider in itsevaluation. (b) Explain what type of financial analyses HLW shouldprepare in order to make a complete evaluation. 4 Explain how HLW'scash management practices may differ from the present if the newmembership plan and fee structure are adopted.
