Allday Fitness Club (AFC) was founded 23 years ago by a married couple, Tom and Theresa, both professional athletes. They had very specific goals for their fitness centre and crafted the following mission for AFC: AFC aspires to help people in the greater Montreal region to lead healthier lifestyles. AFC will provide members with a personalized weight-training program in a welcoming, enjoyable, and pleasant environment that will allow them to achieve their health and fitness goals. AFC is a two-level fitness centre and has three training rooms on the ground level: a spin studio (for stationary cycling classes), a weight-training room, and a fitness room. The second floor houses locker rooms with showers and the administration office. AFC is a small fitness centre but the business has been much more profitable than other small fitness centres, mainly because it has a friendly atmosphere and personalized weight-training programs. AFC is open 20 hours a day, seven days a week. AFC employs one administrative clerk and a trainer for the spin classes. In addition to managing the business, Tom and Theresa create personalized weight- training programs for each member (diet plans and training schedules) and provide the weight-training. In recent years, recreational fitness activities such as yoga, Pilates, Zumba, and group cardio and strength activities have become very popular. Studies have shown that yoga can help reduce stress and anxiety. People perceive recreational fitness as more enjoyable than traditional weight-training. A few major fitness centres already offer these recreational fitness activities and have expanded into group classes to help people prepare for various races. AFC's members continue to sign up for spin classes and weight-training, but Tom has noticed that participation in the spin classes has been static for a few years and participation in weight-training has declined gradually. Tom has always wanted to maintain a profit margin of 10%. Currently, AFC's facility is too small to simply add new activities. The only way to add activities is to remove the equipment from the weight-training room and combine the fitness and the weight-training room into one. Taranjit thinks this change in the market is a great opportunity for them to reduce their time spent on weight-training and focus on managing the business with a potential increase in staff and class scheduling. Tom also thinks that AFC needs to make some changes to remain profitable. The owners believe that they could remain in the weight- training business with minor changes (for example, improve their marketing strategies, add more options to the weight-training programs, increase price for the weight-training membership, and so on), but they would also like to evaluate whether removing the weight-training room and replacing it with recreational fitness activities is a good idea. They are, however, also concerned that this business shift would be drastic and are uncertain of the impact on profitability of the changes over the next five.

years. Before making any changes, Tom would like an idea of how many new recreational fitness members AFC would have to attract to at least cover the expenses initially and over the long term to maintain his target profit margin. Both owners are concerned with the significant capital investment and would like an assessment of whether this investment in recreational fitness is worthwhile and can be recovered within the next five years. You, CPA, are an external consultant hired by AFC to provide business advice that is supported qualitatively and quantitatively. AFC's administrative clerk has given you last year's unaudited financial information (Appendix I). You have also summarized information about the recreational fitness industry (Appendix II) and the costs of the renovation (Appendix III).

Appendix I

Current Year 1 |Year 2 Year 3 Year 4 Year 5 Recreational fitness 0 300 318 337 350 350 Spin classes 165 1403 140 140 140 140 Weight training 384 0 0 0 0Appendix I Income statement as of December 31, 2019 Revenues Spin classes 79,200 Weight training 368.640 Total revenue 447.840 Expenses Salaries 280,000 Operating expenses (including utilities) 84,000 Advertising expenses 12,000 Depreciation expense 6,50( Total expenses 382,500 Operating profit 65,340 Tax (38%) 24,829 Net income 40.511