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Question 1: Budgeting Hawthorn Leisure Works (HLW) offers tennis courts and other physical fitness facilities to its members. The club has 2000...
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Question 1: Budgeting Hawthorn Leisure Works (HLW) ofers tennis courts and other physical Ftness ±acilities to its members. The club has 2000 members. Revenue is derived ±rom annual membership ±ees and hourly court ±ees. The annual membership ±ees are: Individual $45 Student 30 ²amily 100 Approximately hal± the members are '±amily', and the remaining memberships are split equally between individuals and students. ²or the next two Fnancial years, the hourly court ±ees are $8 and $12, depending on the season and the time o± day (prime versus non-prime time). There are 10 courts at each club. The courts are available ±or 12 hours per day, ±rom 9 am to 9 pm. The peak tennis season runs ±rom October to April (181 days). During this period, court usage averages ±rom 90 to 100 per cent o± capacity during prime time (5 to 9 pm) and ±rom 50 to 60 per cent o± capacity during the remaining hours (9 am to 4 pm). Daily court usage during the of-season averages ±rom only 20 to 40 per cent o± capacity, and is charged at $6 per hour. All o± HLW's memberships expire at the end o± September. A substantial amount o± the cash receipts is collected during the early part o± the tennis season due to the renewal o± annual membership ±ees and heavy court usage. However, cash receipts are not as large in autumn and drop signiFcantly in the winter months. ²or the start o± the new Fnancial year on 1 October, HLW is considering introducing a new membership and ±ee structure in an attempt to improve its cash ³ow planning. Under the new membership plan, only an annual membership ±ee would be charged, rather than a membership ±ee plus hourly court ±ees. There would be two classes o± membership, with annual ±ees as ±ollows: Individual $300 ²amily 500 The annual ±ee would be collected in advance at the time the membership application was completed. Members would be allowed to use the tennis courts as o±ten as they wished during the year under the new plan. All ±uture memberships 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 ±ees ±or individual and ±amily memberships would be reduced to $250 and $450 respectively i± members pay ±or their yearly memberships in advance during the two-month promotional campaign. Hawthorn Leisure Works' management estimates that 70 per cent o± the current members will continue with the club, and student members would convert to individual membership. The most active members (45 per cent o± the current members) would pay the yearly ±ee in advance and receive the special ±ee reduction, while the remaining members who continued would renew memberships in October. Those members who would not rejoin are not considered active (that is, they play Fve times or less during the year). Management estimates that the loss o± members would be ofset ±ully by new members within six months o± instituting the new plan. These new members would pay a proportional amount o± the yearly ±ee on joining. ²urthermore, many o± the new members would be individuals who would play during non-prime time. Management estimates that adequate court time will be available ±or all members under the new plan. 1
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If the new membership plan is adopted, it would be instituted at the start of the new Fnancial year (1 October), which is the start of the tennis season. The special promotional campaign would be conducted during August and September, prior to the start of the new Fnancial year. Required: Your consulting Frm has been hired to help HLW to evaluate its new fee structure. Write a letter to the club's managing 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 your answer. 2 Estimate the e±ect on sales revenue resulting from the planned change in fee structure for the next Fnancial year, 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 it decides to adopt or reject it. (a) Identify the key factors that HLW should consider in its evaluation. (b) Explain what type of Fnancial analyses HLW should prepare in order to make a complete evaluation. 4 Explain how HLW's cash management practices may di±er from the present if the new membership plan and fee structure are adopted. Question 2: Pricing & possible plant closure Handy Household Products Ltd is a multiproduct company with several manufacturing plants. The ²remantle plant manufactures and distributes two household cleaning and polishing compounds, standard and commercial, under the Clean & Bright label. The forecast operating results for the Frst six months of the current year, when 100000 boxes of each compound are expected to be manufactured and sold, are presented in the following statement: Clean & Bright Compounds, Fremantle plant Forecast results of operations for the six-month period ending June 30 (in $'000s) Sales Standard $2000 Commercial $3000 Total $5000 Cost of goods sold 1600 1900 3500 Gross proFt $ 400 $1100 $1500 Selling and administrative expenses: Variable $ 400 $ 700 $1100 Fixed* 240 §QQ Total selling and administrative expenses $ 640 $1060 $1700 ProFt (loss) before taxes $ (240) $ 40 = $ (200) *The ±xed selling and administrative expenses are allocated between the two products on the basis of dollar sales volume. 2
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