Many of you will own your own business. One rapidly growing opportunity is no-frills workout centers. These types of centers attract customers who want to take advantage of state-of-the-art fitness equipment but do not need the other amenities of full-service health clubs. One way to own your own fitness business is to buy a franchise. Snap Fitness is a Minnesota-based business that offers franchise opportunities. For a very low monthly fee ($24, without an annual contract) customers can access a Snap Fitness center 24 hours a day. Start-up costs range from $60,000 to $184,000. This initial investment covers the following pre-opening costs: franchise fee, grand opening marketing, leasehold improvements, utility/rent deposits, and training.
Part 1, Section 1: Suppose that Snap Fitness estimates that each location incurs $4,500 per month in general fixed operating expenses and $900 to lease equipment. Mixed costs are equal to $600 per/month (fixed) plus $1 per membership sale (variable). Total variable costs were not provided. A recent newspaper article describing no-frills fitness centers indicated that a Snap Fitness site might require only 315 members per month to break even. Members pay on a monthly basis. Using the information provided above and your knowledge of CVP analysis, estimate the amount of variable costs. (When performing your analysis, assume that the only fixed costs are the estimated monthly operating expenses, equipment lease and the fixed part of the mixed costs.) Explain the results in the paper.
Part 1, Section 2: Using the information from section 1, what would monthly sales in members and dollars have to be to achieve a target net income of $17,000 for the month? Explain the results in the paper. How will you use break even analysis to manage your franchise?
Part 1 Section 2
Use the following formula in order to determine total variable costs. Sales – Variable Costs – Fixed Costs = Net Income. With respect to section one, at the break even point our net income is equal to -0-. As a result, net income in the above equation is equal to -0-. Add the problem data to the above formula and solve for the missing piece of the equation (i.e. variable costs).
Use the solution from part 1, section 1 (i.e. variable costs) in order to calculate the contribution margin (i.e. sales – variable costs) on a per unit (member) basis. In addition to fixed costs, add targeted net income equal to $17K. Utilize the CVP formula to finalize the problem.
Sales: membership sales times the price per member
Minus Variable Costs: See solution in part 1, section 1.
Equals: Contribution Margin in dollars
Contribution Margin in dollars / number of memberships = contribution margin per member.
The next step is to determine what would monthly sales in members and dollars have to be to achieve a target net income of $17,000 for the month? Don't forget to add fixed costs to the CVP formula.
For additional guidance regarding cost volume profit analysis and related cost concepts please review the following.
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