Recreation Facilities Limited (RFL) operates several sport complexes and beach properties in the East African region. AKS, one of the sport complexes, is in an affluent location in a major city. AKS spans seven acres, and it is one of the biggest sport complexes in East Africa. It is visited by affluent dignitaries including government officials, United Nation executives, expatriates working for international firms, and citizens from the local area. AKS offers several activities and services at the location (Appendix 1). It also rents out space to the adjoining hospital for Research and Development activities at $50,000 per year. AKS provides recreational space at no cost to a senior citizen community group (SCG). There are several buildings on the premises. One such building, called Building C, houses the table-tennis room with three tables, two squash courts, and the space given to the SCG. The SCG is responsible for sharing 40% of utility costs for the building. Other operating expenses of Building C and AKS; and membership fee structure are provided in Appendices 2, 3 and 4. Recently it has come to the attention of the General Manager (GM) at AKS that utilization of the squash court is low. As a result, the GM has prepared a proposal for consideration by the C.E.O. of RFL regarding the space occupied by the squash courts.The proposal is presented in Appendix 5

Appendix 1 - List of activities and services at AKS Operated by AKS: Aerobics, Zumba dance, Bollywood dance, cards room, swimming, cricket pitch, soccer pitch, running/walking tracks, hospital emergency helipad area, 2-level gym, sauna and steam room, tennis, table-tennis, basketball, and squash. Owned and operated by third parties and AKS collected rent and commissions from operators: Restaurant - annual rent of $25,000 and 5% on sales which amounts to an average commission of $700 per month Hair salon - annual rent of $5,000 and 10% on sales which amounts to an average commission of $125 per month Health shop - annual rent of $5,000 and 10% on sales which amounts to an average commission of $200 per month Massage services - where the third-party operator shares 50% of the net revenues (after-tax) with AKS. AKS is responsible for collecting the entire proceeds from massage services, and it pays taxes on revenues collected. The remaining amount is split equally between the operators of massage services and AKS. The amount paid to the masseuse is $700 per month on average Vending machines - annual rent of $500 per vending machine and 1% on sales which amounts to an average of $10 per month Appendix 2 - Building C - Five percent of space in terms of square feet compared to the entire complex. - Operates Monday - Friday from 6:00 a.m. to 9:00 p.m. and on weekends from 9:00 a.m. to 5:00 p.m. - Employs three salaried staff at a monthly salary of $5,000 each. These workers can work in any activity offered at the complex, but they are usually assigned to Building C. - Employs three hourly waged workers paid at $15 per hour during the weekdays to monitor minors while playing. - Five different advertisers place their advertisements in the building, and total annual revenue from these five advertisers is $30,000. - Costs of running the common washroom in this building are $500 per month. This amount is for washroom supplies, and cleaning supplies. The cleaning is done by one of the hourly waged workers. - Monthly maintenance costs $1,000 (for touch up painting, replacement of entrance carpets, replacement of other chattels due to wear and tear, etc.). Appendix 3 - Operating expenses for AKS (annual unless mentioned otherwise) Monthly electricity bill $6,000 Monthly water usage bill $2,500 Monthly total salaried labour cost $25,000 Property taxes $15,000 Insurance $25,000 Security fees $10,000 Income tax rate 18% Appendix 4 - Fee structure for AKS One-time registration fee per person $2,000 Adult annual membership (18 years and older) $2,000 Junior annual membership (younger than 18 years) $1,500 Visitor (non-member) day pass $35 Appendix 5 - Proposal Shut down the squash courts and rent the space out to a community youth group (YG). The YG will pay a monthly rent of $2,500. AKS will also charge the YG for their share of utilities based on an appropriate allocation to be recommended by the C.E.O. of RFL. Currently the squash courts occupy 30% of space Building C. Two of the advertisers will be lost if the squash courts are shut down. Ten adult members and five junior members who were exclusively members due to the squash activities may leave the club. The GM anticipates that 20% of these exclusive members will be retained due to the prestige associated with retaining their membership. Moreover, on average, there are five non-members who use the squash courts facilities twice a week. It is anticipated that two of these visitors who visited AKS to learn squash with their coach, would be lost. In order to rent out the space to the YG, modifications will have to be made to the courts which would amount to $6,000. The GM recommends depreciating this amount over two years. The YG has agreed to pay 50% of this amount. Renting the space out would also mean that one of the hourly waged workers will be laid off. A one-time severance package amounting to $3,000 will be paid. One of the salaried workers will not be required at Building C. One other salaried worker who was assigned to the swimming pool was supposed to retire this year with a retirement package payout of $10,000. The salaried worker not required in Building C will be used to replace the retiring salaried worker from the swimming pool. The squash courts currently have an independent coach assigned to it who pays AKS 50% of the after-tax revenue collected from coaching. The coach collects an average of $1,000 before taxes per month. One vending machine will no longer be required if the squash courts were shut down. The GM is also aware that renting out the space in Building C may lead to more costs in maintenance of the building including washroom maintenance. It is expected that maintenance costs of Building C would increase by 6% annually.

As the GM, prepare a report for the senior management team of RFL, advising them on whether to accept or reject the proposal. Include details of your analyses, and a fully supported recommendation. In undertaking this task, you will need to take into consideration only the information provided above and reasonable assumptions. it must explicitly state the exclusive effect on Net Income for AKS as a result of your recommendation.

QUESTION

As the GM, prepare a report for the senior management team of RFL, advising them on whether to accept or reject the proposal. Include details of your analyses, and a fully supported recommendation. In undertaking this task, you will need to take into consideration only the information provided above and reasonable assumptions. Your report must explicitly state the exclusive effect on Net Income for AKS as a result of your recommendation.