To the Senior Management of Recreation Facilities Limited (RFL)

Introduction:
The AKS complex is on seven acres of land. It offers several different activities for its
members. There are multiple buildings in the complex. Building C is shared by the Senior
Citizen Community Group (SCG), three table-tennis tables, and two squash courts. Due to low
utilization of the squash courts the general manager of AKS has proposed that the space being
used for squash courts should be rented out to the community Youth Group (YG). The report
however shows that the general managers idea should be rejected because it would result in
lower profits.
Recommendation:
The proposal introduced by the GM should be rejected as it results the net income of AKS to
decrease from $101,828 before the proposal to a net loss of $24,910 after the required changes
have been implemented causing AKS a total net income decline of $126,738. Building C clearly
generates more revenue with squash courts in comparison to renting the space. Keeping the
squash courts also reduces cost as there is no need to modify the courts. It would also save the
$3,000 severance charge that would have to be paid because the hourly wage worker is
dismissed. Refraining from renting the space keeps the maintenance cost at $1,000 whereas
renting the space would result in a 6% increase in maintenance costs. There are few cons to this
option. Keeping the squash courts results in a higher total cost because more workers are
required to run the squash courts resulting in an increase in salary expense. Second, the
utilization of the squash courts is low and therefore causing the complex to lose potential profits.
The first issue that AKS faces is they lose the $30,000 revenue that would generate by renting

the space to YG, and by renting the space AKS loses revenue of $6,000 that is generated by the
squash coach. The second issue faced by AKS in rejecting the proposal is they will need to hire a
new salary worker to replace the retiring worker.
Conclusion:
In the event of rejecting the proposal certain cons and issues have to be resolved in order
for AKS to attain maximum profits. The first con can be dealt with by lowering employee
salaries and hourly wages or by increasing the membership fees. The second con of low
utilization of the squash court can be managed by holding squash tournaments for members
leading to an increase in the utilization of the court and increasing members interest in squash.
The issues with rejecting the proposal require a solution which is for the first issue; AKS should
provide the YG with space to rent in a different building so that the complex can still obtain the
rent revenue from YG. The second issue of the retiring salary worker has a simple solution, AKS
will need to hire and train a new employee to replace the retiring worker. In short, the C.E.O of
RFL should reject the proposal placed by the GM of AKS and instead implement solutions to the
cons and issues faced currently by AKS.
Appendix
Pros (Advantages of Option):

Building C generates more revenue with the squash courts compared to renting out the
space to the community youth group.
Keeping the squash courts eliminates the need to modify the area therefore no
modification costs are incurred.
Rejecting the proposal and keeping the squash courts allows for the hourly wage worker
to keep their job. No job loss occurs and the cost of the severance package $3,000 is
saved.
Maintenance costs of the facility remain the same rather than the 6% increase which
would occur if the space was rented.

Cons (Disadvantages of Option):

Total costs incurred are higher because salaries are distributed to more workers.
Utilization of the squash court is low and therefore is not maximizing profit.

Issues of Option:

The loss of $30,000 potential rent revenue from the Youth Group.
One more salary worker will have to be hired due to the retiring of the swimming pool
worker.

Assumptions before Proposal:

Commission Revenue = Restaurant + Hair saloon + Health shop + Message Service +

Vending Machine
= ($700*12) + ($125* 12) + ($200*12) + ($700*12) + ($10*12)
= $20,820
Coaching Revenue = (Coach revenue * months) * 50% commission
= ($1,000*12)*50%
= $6,000
Electricity Expense = [(Amount $ * 5% space occupied)*(1- 40% utilities paid by
SCG)]*12 months
= [($6,000 * 5%)*(1-40%)]*12
= $2,160
Water Expense = [(Amount $*5% space occupied)*(1-40% utilities paid by SCG)]*12
= [($2,500*5%)*(1-40%)]*12
= $900
Salary Workers = [3 workers*(total salary/total salary workers)*12] +Retirement package
= [3*($25,000/5)*12] + $10,000
= $190,000
Hourly Workers = [3 workers * ( hour wage* total hours worked) * total weeks
= [3 * ($15*75) * 52]
= $175,000
Property tax = ($ amount * 5% space occupied)
= $15,000 * 5%
= $750
Insurance = ($ amount * 5% space occupied)
= ($25,000 * 5%)
= $1,250
Security Fees = ($ amount * 5% space occupied)
= ($10,000 * 5%)
= $500

Assumption After proposal:

Electricity Expense = [$amount*Space occupied]*(1- 40% SCG utility share+30% YG

space occupied) * 12 months
= [$6,000*5%]*(1-70%) * 12
= $1,080
Water Expense = [$amount*Space occupied]*(1- 40% SCG+30% YG) * 12 months
= [$2,500*5%]*(1-70%) * 12
= $450
Salary Workers = [2 workers * $5,000] * 12 months + Retirement package
= [$10,000] * 12 + $10,000
= $130,000
Hourly Workers = [$15hr * 75hr]*2 workers * (52 weeks) + Severance package
= $117,000 + $3,000
= $120,000

Quantitative Analysis:
Net Income for AKS Before Proposal
$
Total Revenue:
Registration Fee ($2,000*15
members)
Sales Revenue
[($20,000*12)+($7,500*12)+$10,920]
Rent Revenue
Commission Revenue
Coach Revenue ($12,000*50%)
Advertisement Revenue
Total Revenue
(-) Total Costs:
Electricity
Water
Salaried Workers
Hourly Workers
Property Tax
Insurance
Security Fees
Maintenance Cost
Washroom Maintenance Cost
Total Costs
Operating Income
(-) Income Tax ($124,180*0.18)
Net Income

$
30,000
340,920
85,500
20,820
6,000
30,000
513,240

2,160
900
190,000
175,500
750
1,250
500
12,000
6,000
389,060
124,180
(22,352.40)
101,827.60 101,828

Net Income for AKS After Proposal

$
Total Revenue
Commission Revenue ()
Vending Machine revenue
Rent Revenue () Vending
Machine revenue
Sales Revenue
($48,000+$18,000)
Registration Fee Revenue
Youth Group Rent Revenue
Advertising Revenue
($6,000*3)
Total Revenue
(-) Total Costs
Modification Cost
Electricity
Water
Salaried Workers
Hourly Workers
Property Tax
Insurance
Security Fees
Maintenance Cost
Washroom Maintenance Cost
Total Costs
Net Loss

$
20,700
85,000
66,000
30,000
30,000
18,000
249,700

1,500
1,080
450
130,000
120,000
750
1,250
500
12,720
6,360
274,610
24,910