Problem:
City Racquetball Club (CRC) offers racquetball and other physical fitness facilities to its members. There are four of these clubs in the metro area. Each club has between 1,800 and 2,500 members. Revenue is derived from annual membership fees and hourly court fees. The annual fees are as follows:
Individual $40
Student 25
Family 95
The hourly court fees vary from $6 to $10 depending upon the season and time of day (prime vs nonprime).
The peak racquetball season is considered to run from September thru April. During this period, court usage averages 90 to 100% of capacity during prime time (5-9pm) and 50 to 60% of capacity during the remaining hours. Daily court usage during the off-season (summer) averages only 20 to 40 % of capacity.
Most of CRC's memberships have September expirations. A substantial amount of the cash receipts are collected during the early part of the racquetball season due to the renewal of the annual membership fees and heavy court usage. However, cash receipts are not as large in the spring and drop significantly in the summer months.
CRC is considering changing its membership and fee structure in an attempt to change its cash receipts. 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 as follows:
Individual $250
Family 400
The annual fee would be collected in advance at the time the membership application is completed. Members would be allowed to use the racquetball courts as often as they wish during the year under the new plan.
All future memberships would be sold under these new terms. Current memberships would be honored on the old basis until they expire. However, a promotional campaign would be instituted to attract new members and to encourage current members to convert to the new membership immediately.
The annual fee for individual and family memberships would be reduced to $200 and $300, respectively, during the two-month promotional campaign. In addition, all memberships sold or renewed during this period would be for 15 months rather than the normal one-year period. Current members would also be given credit toward their annual fee and for the unexpired portion of their membership fee, and for all prepaid hourly court fees for league play that have not been used.
CRC's management estimates that 60-70% of the present membership would continue with the club. The most active members (45% of the present membership) would convert immediately to the new plan, while the remaining members who continue would wait until their current memberships expire. Those members who would not continue are not considered active (i.e. they play five or less times during the year). Management estimates that the loss of members would offset fully by new members within six months of instituting the new plan. Furthermore, many of the new members would be individuals who would play during nonprime time. Management estimates that adequate court time will be available for all members under the new plan.
If the new plan is adopted, it would be instituted on February 1, well before the summer season. The special promotional campaign would be conducted during March and April. Once the plan is implemented, annual renewal of membership and payment of fees would take place as each individual or family membership expires.
Required to do:
Question 1. Will CRC's new membership plan and fee structure improve its ability to plan its cash receipts? Explain.
Question 2. CRC should evaluate the new membership plan and fee structure completely before it decides to adopt or reject it.
A. Identify the key factors that CRC should consider in its evaluation.
B. Explain what type of financial analyses CRC should prepare in order to make a complete evaluation.
Question 3. Explain how CRC's cash management would differ from the present if the new membership plan and fee structure were adopted.