Two years ago, Mightyfine Township took over the swimming pool of a defunct private swim club and converted it into a community pool financed by user charges. Most user charges are in the form of low-cost family season passes sold to Township residents; the fee charged to nonresidents is five times the fee charged to residents.
The township manager boasts about how he can provide such fine swimming facilities at a low cost to residents. He dismisses last year's dismal financial results-the first year the Township ran the pool-as an aberration. During that year, a diving board and baby pool were added to the facilities. In his report to the Board of Supervisors, the manager presents the following schedule, taken from a subsidiary ledger in the township's general fund without adjustment.
MIGHTYFINE TOWNSHIP COMMUNITY SWIMMING
POOL Operating Statement
Season passes-residents.......................................$ 224,000
Season passes-nonresidents.......................................50,000
Daily admission fees................................................13,000
Concessions, net.................................................... 37,000
Total revenues..................................................... 324,000
Salaries-pool manager and lifeguards........................ 228,000
Maintenance and repairs........................................... 67,000
Total expenditures..................................................295,000
Excess of revenues over expenditures...........................$ 29,000
1. Fair value of original pool (20-year life) ......................................$3,000,000
2. Cost of baby pool addition (25-year life) ........................................500,000
3. Cost of diving board (10-year life).............................................. 150,000
4. Cost of rider to Township's liability insurance (paid by the Township) ..... 42,000
Required
a. Discuss the basis of accounting used in the above report.
b. What deficiencies in the report cause it to depart from GAAP?
c. Evaluate whether the township manager is justified in boasting. Support your evaluation with a numerical analysis.
d. A township resident who teaches accounting at Superfine University states that the pool is never crowded and that more revenue could be generated by reducing the cost of nonresident season passes from $200 per family to $120 per family. She estimates that the price elasticity of demand [= - (Aq/q)/(Ap/p)] for a nonresident season pass is 2.5. Using the professor's numbers, calculate the additional revenue generated from lowering the cost of nonresident season passes.