Assignment
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:
1. Individual $90
2. Student 60
3. 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:
1. Individual $ 630
2. 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.
Task
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:
I. Prepare the revenue budget under the existing scheme.
II. Prepare the revenue budget under the new scheme
III. Compare and contrast the two sets of budgets you have prepared in answer to requirements (i) and (ii). 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.