Merlion Club offers tennis courts and other sporting facilities to its members.
The club has 2,000 members. Revenue is derived from annual membership
fees and hourly court fees.
The annual membership fees are:
• Individual $90
• Student 60
• Family 200
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 $20 and $30 depending on the season and time
of day (prime versus non-prime time). The club has 10 courts, and these courts
are available for 12 hours per day, from 9am to 9 pm.
The peak tennis season runs from January to July (181 days). During this
period, court usage averages from 90% to 100% of capacity during prime time
(5pm to 9pm) and from 50% to 60% of capacity during the remaining hours
(9am to 4pm). Daily court usage during the off-peak season averages from 20%
to 40% of capacity and is charged at $12 per hour. All Merlion Club’s
memberships expire at the end of December. A substantial amount of the 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 the off-peak months.
For the start of the new financial year on 1 January 2023, Merlion Club 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 $ 630
• Family 1,050
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
membership 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
membership would be reduced to $500 and $900 respectively if members pay
for their yearly memberships in advance during the two-month promotional
campaign.
Merlion Club’s management estimates 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 the current members) would
pay the annual fee in advance and receive the special fee reduction, while the
remaining members who continued would renew membership in January.
Those members who would not re-join are not considered active (that is, they
play 5 times or less during the year). Management estimates that the loss of
members would be offset fully by new members within 6 months of instituting
the new plan. These new members would pay a proportional amount of the
annual fee on joining. Furthermore, many of the new members 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 January 2023), which is the start of the tennis season.
The special promotional campaign would be conducted during November and
December, prior to the start of the new financial year.
Required:
You have been engaged to help Merlion Club to evaluate its new fee structure.
Write a report to the President of Merlion Club dealing with the following issues:
(a) Prepare the revenue budget under the existing scheme.
(b) Prepare the revenue budget under the new scheme
(c) Compare and contrast the two sets of budgets you have prepared in answer
to requirements (a) and (b). Advise Merlion Club’s management on the
relative merits of the two alternative plans/strategies including how the cash
management practices may differ. Advise which plan/strategy should be
adopted and why.