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Explain briefly how a fall in interest rates from 0.5% to 0.0% would influence consumer spending and unemployment issues. You need to refer to the circular flow of income model. The Zone The Zone is a sports and leisure facility situated approximately 2.5 miles from Birmingham City Centre. It was established in the 1990s to provide opportunities for local residents to escape from the urban sprawl every morning, lunch break and evening, mainly targeting the business classes living and working in and around Birmingham. The club has superb facilities which give adults and children the opportunity to play, swim, and keep fit or simply socialise in a warm and welcoming atmosphere. The Zone is a member only facility. The annual membership fee is ?600 for adults and ?300 for children. This provides access to: 4 tennis courts 6 squash courts a fully equipped gym with personal fitness training indoor swimming pool, sauna, steam room and solarium a host of leisure classes including sports massage and karate a lounge bar serving beverages and light meals a popular restaurant for family and friends and to entertain business clients Upon membership, new members receive an induction that covers an introduction to all the facilities that are offered. In addition, a complimentary Personal Lifestyle session is offered by qualified and experienced staff where personal goals can be established. This could involve weight-loss, an increase in fitness or a more positive and healthier view towards exercise. An annual squash tournament is held attracting participants and visitors from all over Europe. Last year, the tournament attracted 9,000 visitors. Owing to a fall in consumer spending in the UK and elsewhere, the management are increasingly concerned that visitor numbers are not going to be as high as in the past. Therefore, the tournament committee is looking at ways of increasing visitor numbers from UK destinations to compensate for this decline, as well as possibly maintaining interest at European level to achieve at least a breakeven figure. Last year’s tournament generated sales of ?150,000 and incurred total costs of ?122,500, of which ?110,500 was fixed costs. Apart from the squash tournament and complimentary personal lifestyle sessions, a number of other methods are also used to promote the sports and leisure facilities offered. Regular open days are held, including celebrity visits from the tennis and squash world; the BRMB Radio breakfast show is sponsored by The Zone with frequent mentions throughout the week; and back-page advertising in a popular European sports magazine is done on quarterly basis. Membership applications can be made via The Zone’s website, through the post, or by hand during the day. Much of the food and beverages required for the restaurant and bar are bought in bulk from a local wholesaler on 30 days credit. During busy periods, the restaurant requires at least 48 hours’ notice for table bookings. The restaurant manager has recently noticed that the wastage of food, particularly during the peak times, is relatively high. The Lounge Bar offers a place to relax and chat after a strenuous game of squash or tennis. Serving as the central gathering point, members find it a great place to meet new friends and playing partners over a few drinks or a light snack. There is also an excellent menu available between 11.45am to 11.00pm in the restaurant. Research conducted by a student on work experience from University College Birmingham on behalf of The Zone, has revealed that although the demand for its services is relatively inelastic, the current economic conditions point to a reduction in consumer confidence. Increasing costs combine with this pessimistic mood to create an uncertain business environment. However, there is surplus space available at The Zone and the owner is giving serious consideration to the following proposals that would allow the business to expand into other areas which potentially would make the business even more profitable. PROPOSAL 1: THE SPORTS CLINIC The surplus space can be used to establish a sports clinic offering advice and treatment for sports related injuries. The clinic will initially offer a range of therapies, sports massage, physiotherapy and chiropody. The marketing manager believes that this is likely to compliment the range of sports offered and provide an additional service to members. The initial cost of this proposal is estimated at ?190,000. PROPOSAL 2: THE SPORTS STORE The space could be used for a sports store that would stock a wide range of reasonably priced, attractive sportswear by leading names that would complement the sports and leisure facilities already offered. The initial cost of this is estimated at ?150,000. There is only enough finance and space available for one of these proposals. You are to assess the two proposals. An 11% return on investment is required for both proposals. Projected cash flows and profits are as follows: The Sports Clinic The Sports Store Year Cash flows Profit Cash flows Profit ? ? ? ? 1 55,000 30,500 50,000 23,000 2 58,000 34,000 52,000 29,000 3 60,500 36,500 55,000 33,500 4 62,000 37,500 52,500 39,000 5 61,500 37,000 48,500 40,500 You have also been provided with the following trial balance for the business at 31st August 2011. ?Debits ?Credits Sales 901,791 Bank 22,846 Bank Loan 75,000 Capital 213,500 Trade Debtors & Trade Creditors 24,050 34,750 Food & Beverage Purchases 68,962 Stock of Food & Bev at 1st September 2010 25,345 Rent and Rates 199,543 Salaries 285,349 Motor & Travelling Expenses 168,561 Insurance 21,075 Advertising 95,438 Fixtures & fittings 175,850 Sports Equipment 95,500 Motor Vehicles 25,500 Telephone 21,327 Professional Charges 6,450 Loan interest 9,573 Repairs & Renewals 8,239 Miscellaneous Expenses 4,625 Drawings 12,500 ________ ________ 1,247,887 1,247,887 Closing stock of Food and Beverages at 31st August 2011 was ?30,000.
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