Exercise 11
About Ravenswood Leisure Centre
Ravenswood Leisure Centre has the following facilities:
- A leisure pool
- A multipurpose sports hall
- Four (4) squash courts
- Changing rooms that include saunas and Jacuzzis
The Leisure Centre has just finished its first year of operation. It was built at a cost of $6 million.
Corby City Council, owners of the complex, are keen to find out the profitability of the whole business and each of its departments separately.
The total income from the complex was $1.55 million. Table 1 provides a breakdown of this amount per department.
| Table 1: Revenue per Department | |
|
|
$’000s |
| Leisure Pool |
650
|
|
Sports Hall |
600 |
|
Sauna / Jacuzzis |
50 |
| Squash Courts |
250 |
| Total |
1550 |
The business also had operating costs of $795,000 for the year and financing costs of $65,285 per month.
| Table 2: Costs per Department | |
|
|
$’000s |
|
Cleaning |
20 |
|
Fuel for Air Conditioning Plant |
50 |
|
Office Administration |
75 |
|
Electricity |
40 |
|
Rates and Insurance |
10 |
|
Building Maintenance |
15 |
|
Security |
15 |
|
Staff Salaries and Wages |
565 |
|
Uniforms |
5 |
|
Total |
795 |
| Table 3: Financing Costs | ||||
| Financier |
Capital
Amount |
Interest
Rate |
Loan
Years |
Repayment
Per Month |
| National Australia Bank |
$1.5 million
|
7%
|
5
|
$29,700
|
| Corby Council |
$4.5 million
|
5%
|
15
|
$35,585
|
| Total |
$6.0 million
|
$65,285
|
||
Your Task
Work out the overall profitability of the complex, and the profitability of eaach of the four departments.
Overview of Exercise.
The purpose of this exercise is to show how to calculate profitability of individual "departments" of a business. In this example, the business "Ravenswood Leisure Centre" has four departments - a leisure pool, a sports hall, squash courts and a sauna/jacuzzi area.
Calculating profitability of individual departments can only be done if all income and all costs can be allocated to individual departments. This poses a challenge, as businesses has no way of measuring with any accuracy how much each department costs in electricity, administration, cleaning and other types of overheads. These types of cost can only be arbitrarily divided between departments. (arbitrary = at one's own discretion).
Allocating Overheads
In order to estimate the profitability of individual departments in a business, all overheads must be divided up and allocated. The cost of Rates, Electricity, Insurance, Administrative Salaries and Financing Costs are typical examples of business overheads.
How would you divide up and allocate the cost of Electricity? One method might be to use the proportion of total floor space for each department. It stands to reason that the greater the floor space a department has, the more Electricity it would use. Table 4 shows the proportions of floor space used by each department.
| Table 4: Proportions of floor space for each department. | ||
|
Cost Centre |
Floor Area M2 |
Floor Area % |
|
Leisure Pool |
1,400 |
47%
|
|
Sports Hall |
1,200 |
40%
|
|
Changing / Sauna / Jacuzzis |
100 |
3%
|
|
Squash Courts |
300 |
10%
|
|
Total |
3,000 |
100%
|
Another method might be to use the proportion that each department has of the total number of employees. Some costs might be very dependant on the number of people employed. For example, Administration costs would be greater where there are more staff employed. Table 5 shows the proportions of staffing in each department.
| Table 5: Proportions of staffing establishment | ||
|
Leisure Pool Staff |
14 |
43%
|
|
(3 Senior Recreation Assistants, 9 Recreation Assistants, 2 Instructors) |
||
|
Sports Hall |
10 |
30%
|
|
(4 Senior Recreation Assistants, 6 Recreation Assistants) |
||
|
Sauna/Jacuzzi |
4 |
12%
|
|
(4 Senior Recreation Assistants, 2 Trainees) |
||
|
Squash Courts |
5 |
15%
|
|
(2 Supervisors and Part-time staff) |
||
|
Total Full-Time Equivalent |
33 |
100%
|
A third method might be to use the capital cost of each department. The capital cost is the cost of building the department. Table 6 shows the proportions of capital cost for each department.
| Table 6: Capital Cost Breakdown | ||
|
Cost Centre |
Capital Cost $’000s |
Capital Cost % |
|
Leisure Pool |
2,700 |
45%
|
|
Sports Hall |
2,300 |
38%
|
|
Changing / Sauna / Jacuzzis |
200 |
3%
|
|
Squash Courts |
800 |
14%
|
|
Total |
6,000 |
100%
|
Getting Started
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