Reference no: EM133175400

Question - Another chain, Phase3 Sports Club, is opening an exquisite new gym with a luxury spa within the city centre of Leeds as part of its growth strategy, but it needs to attract new members to make sure it survives. Over the last few years, demand for sports facilities has been rising as more and more consumers become health conscious, resulting in a significant increase in the number of sports clubs within the city of Leeds. Phase3 club has to come up with the right pricing strategy to attract and retain customers to achieve their financial objectives. The budgeted fixed costs (for the rental of the building and sports equipment) for the first month are £7,500, and they are expected to be 27.27% of the total overheads at breakeven. The managers estimate that each member will use about £200 in resources over a year. In addition, each club member will be charged a £275 annual membership fee.

The management accounting team has the following questions for you:

a. How many members will the club need to have to break even?

b. Calculate the margin of safety percentage if Phase3 attracts 200 or 300 members in the first month.

c. If Phase3 wishes to make a profit of £2,400, how many members should it target?

d. The managers decide that a £275 fee is too high. What would happen if they reduced the membership fee to £245? Make the adjustment and recalculate the contribution, breakeven point, and margin of safety percentages at output levels stated in b) and advise management of the feasibility of a price reduction.

e. Explain the limitations of Cost Volume Profit (CVP) analysis.