Case Analysis

Topics: Variable cost, Costs, Cost Pages: 22 (6964 words) Published: June 30, 2015
Case 1
Riverside Leisure Centre

Introduction
The Riverside leisure centre was opened in 1973 with a leisure pool, sports hall, 4 squash courts and changing rooms. June West is the new and very ambitious manager.

Squash courts 1 and 2 have been recently refurbished and are fully booked most of the day. The other two squash courts next to the fitness room are now in urgent need of repair and are rarely booked.

The fitness room is too small. It is clear that the leisure centre is losing members because the fitness room is too busy. Other leisure centres locally are reporting a big increase in membership of their fitness rooms.

June believes it is important to increase the size of the fitness room by incorporating one or both of the squash courts that are rarely booked.

Laura is the management accountant for the leisure centre and she has been asked to evaluate the alternative proposals.

Proposals

(i)Alternative 1- Incorporate squash court No. 4
Increase the size of the fitness room by incorporating squash court 4. This would increase the size of the fitness room from 2,200 sq. ft to 2,700 sq. ft.
Squash court 3 would remain and it would be refurbished immediately.

(ii)Alternative 2 – Incorporate squash courts 3 and 4
Increase the size of the fitness room by incorporating squash courts 3 and 4. This would increase the size of the fitness room from 2,200 sq. ft to 3,200 sq. ft.

Capital costs
The capital costs of the alternatives include building works, services, equipment, and professional fees. Estimates are given below:

Building works

Alternative 1
Alternative 2

Doors
P 1,100
P 1,100
Remove existing walls
P 2,200
P 3,600
New ceilings
P 1,900
P 3,200
Fire exit
P 3,300
P 3,600
Decoration
P 7,100
P 10,600
Total
P 15,600
P 22,100

Services

Alternative 1
Alternative 2

Electrical
P 4,000
P 5,700
Lighting
P 2,000
P 3,200
Air conditioning
P 14,000
P 12,000
Total
P 20,000
P 20,900

Equipment

Alternative 1
Alternative 2

Cardio-vascular machines
(bikes, rowers)
P 38,000
P 78,000
Cardio theatre
P 7,000
P 7,800
Drinking fountain
P 1,100
P 1,100
Total
P 46,100
P 86,900

A residual figure at the end of 6 years was estimated at P 6,000 for alternative 1 and P 9,000 for alternative 2.

Professional fees and charges

Professional fees and charges have been estimated at P 6,000. (This cost will be incurred as soon as a decision is made)

Annual costs

The management wants to appoint only one permanent member of staff and then increase the number of casual staff at peak times. A nominal estimate for utilities and cleaning costs has been included in the costings as these costs are not expected to change significantly. The maintenance and repair contracts are for the first year only and the suppliers will not commit themselves to providing estimates after the first year. An estimate for the costs are given below:

Alternative 1
Alternative 2

Permanent staff
19,000
19,000
Casual staff
8,000
12,000
Utilities
1,400
1,800
Maintenance contracts
8,200
12,200
Cleaning and other
2,100
2,100

The cost of advertising the new facilities at the leisure centre is estimated at P 15,000 in the first year. June believed an aggressive advertising policy was essential to ensure the project was a success. No estimate for advertising was considered for later years.

Estimating additional annual revenue for fitness room (two different approaches are to be considered)

June
She has suggested that additional revenue should be estimated by dividing the current income of P 180,000 by 2,200 sq. ft to determine income per sq. ft. The income per sq. ft. is assumed to remain constant as the size of the fitness room is increased. Basing income on square footage is seen as a simple but accurate way of estimating future income.

Laura
Laura suggested a different approach. She suggested...
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