Case Problem


[Page 513]

V ALLEY S WIM C LUB

The Valley Swim Club has 300 stockholders , each holding one share of stock in the club. A share of club stock allows the shareholder's family to use the club's heated outdoor pool during the summer, upon payment of annual membership dues of $175. The club has not issued any new stock in years, and only a few of the existing shares come up for sale each year. The board of directors administers the sale of all stock. When a shareholder wants to sell, he or she turns the stock in to the board, which sells it to the person at the top of the waiting list. For the past few years , the length of the waiting list has remained relatively steady, at approximately 20 names .

However, during the past winter, two events occurred that have increased the demand for shares in the club. The winter was especially severe, and subzero weather and heavy ice storms caused both the town and the county pools to buckle and crack. The problems were not discovered until maintenance crews began to ready the pools for the summer, and repairs cannot be completed until the fall. Also during the winter, the manager of the local country club had an argument with her board of directors and one night burned down the clubhouse. Although the pool itself was not damaged, the dressing room facilities, showers, and snack bar were destroyed . As a result of these two events, the Valley Swim Club was inundated with applications to purchase shares. The waiting list suddenly grew to 250 people as the summer approached.

The board of directors of the swim club had refrained from issuing new shares in the past because there was never a very great demand, and the demand that did exist was usually absorbed within a year by stock turnover . In addition, the board has a real concern about overcrowding. It seemed like the present membership was about right, and there were very few complaints about overcrowding, except on holidays like Memorial Day and the Fourth of July. However, at a recent board meeting, a number of new applicants had attended and asked the board to issue new shares. In addition, a number of current shareholders suggested that this might be an opportunity for the club to raise some capital for needed repairs and to improve some of the existing facilities. This was tempting to the board. Although it had set the share price at $500 in the past, the board could set it at a much higher level now. In addition, any new shares sold would result in almost total profit because the manager, lifeguard, and maintenance costs had already been budgeted for the summer and would not increase with additional members .

Before the board of directors could make a decision on whether to sell more shares and, if so, how many, the board members felt they needed more information. Specifically, they would like to know the average number of people (family members, guests, etc.) that might use the pool each day during the summer. They would also like to know the number of days they could expect more than 500 people to use the pool from June through August, given the current number of shares.

The board of directors has the following daily attendance records for June through August from the previous summer; it thinks the figures would provide accurate estimates for the upcoming summer:

139

380

193

399

177

238

273

367

378

197

161

224

172

359

461

273

308

368

275

463

242

213

256

541

337

578

177

303

391

235

402

287

245

262

400

218

487

247

390

447

224

271

198

356

284

399

239

259

310

322

417

275

274

232

347

419

474

241

205

317

393

516

194

190

361

369

421

478

207

243

411

361

595

303

215

277

419

 

497

223

304

241

258

 

341

315

331

384

130

 

291

258

407

246

195

 

The board has developed the following criteria for making a decision on whether to issue new shares:

  1. The expected number of days on which attendance would exceed 500 should be no more than 5 with the current membership.

  2. The current average daily attendance should be no more than 320.

  3. The average daily weekend (Saturday and Sunday) attendance should be no more than 500. ( Weekend attendance is every sixth and seventh entry in each progression of seven entries in the preceding data.)

If these criteria are met, the club will issue one new share, at a price of $1,000, for every two average attendees between the current daily average and an upper limit of 400.

Should the club issue new shares? If so, how many will it issue, and how much additional revenue will it realize?




Introduction to Management Science
Introduction to Management Science (10th Edition)
ISBN: 0136064361
EAN: 2147483647
Year: 2006
Pages: 358

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