Reference no: EM131139152

1. City Racquetball club (CRC) offers racquetball and other physical fitness facilities to its members. There are four of these clubs in the metropolitan area. Each club has between 1,800 and 2,500 members. Revenue is derived from annual membership fees and hourly court fees. The annual membership fees are as follows:

Individual $ 40
Student 25
Family 95

The hourly court fees vary from $6 to $10 depending upon the season and the time of day (prime versus non-prime time).

The peak racquetball season is considered to run from September through April. During this period court usage averages 90 to 100 percent of capacity during prime time (5:00-9:00 P.M.) and 50 to 60 percent of capacity during the remaining hours. Daily court usage during the off-season (i.e., summer) averages only 20 to 40 percent 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's 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:

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 special promotional campaign would be instituted to attract new members and to encourage current members to convert to the new membership plan immediately.

The annual fees 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 also would be given a credit toward the annual fee for the unexpired portion of their membership fee, and for all prepaid hourly court fees for league play which have not yet been used.

CRC's estimates that 60 to 70 percent of the present membership would continue with the club. The most active members (45 percent 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 fewer times during the year). Management estimates that the loss of members would be 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 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 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 memberships and payment of fees would take place as each individual or family membership expires.

Required: Your consulting firm has been hired to help Triple-F Health Club evaluate its new fee structure. Write a letter to the club's president answering the following questions.

Will Triple-F Health Club's new membership plan and fee structure improve its ability to plan its cash receipts? Explain your answer.

Triple-F Health Club should evaluate the new membership plan and fee structure completely before it decides to adopt or reject it.

Identify the key factors that Triple-F should consider in its evaluation.

Explain what type of financial analyses Triple-F should prepare in order to make a complete evaluation.

Explain how Triple-F Health Club's cash management would differ from the present if the new membership plan and fee structure were adopted.

2. The following data are the actual results for Marvelous Marshmallow Company for October.

Actual output .......................................................................................................9,000 cases
Actual variable overhead ................................................................................ $405,000
Actual fixed overhead .................................................................................... $122,000
Actual machine time .......................................................................................... 40,500 machine hours
Standard cost and budget information for Marvelous Marshmallow Company follows:
Standard variable-overhead rate .......................................................................... $9.00 per machine hour
Standard quantity of machine hours .......................................................................... 4 hours per case of marshmallows
Budgeted fixed overhead .............................................................................. $120,000 per month
Budgeted output .............................................................................................. 10,000 cases per month

Required:

1. Use any of the methods explained in the chapter to compute the following variances. Indicate whether each variance is favorable or unfavorable, where appropriate.

a. Variable-overhead spending variance.
b. Variable-overhead efficiency variance.

2. Build a spreadsheet: Construct an Excel spreadsheet to solve the preceding requirement. Show how the solution will change if the following information changes: actual output was 9,100 cases, and actual variable overhead was $395,000.