Description
Case Study:
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 3: Provide several examples of variable costs and fixed costs for a fitness center. Discuss how cost structure, relevant range, margin of safety, cost behaviors, and CVP apply to the case study. How do you plan to use this in order to manage the business and plan for profitability? What type of internal accounting reports would you prepare? Why?
Part 1, Section 4: Go to a competitor's internet site and find information about purchasing their franchise. Summarize the franchise data so your team can make an informed business decision regarding your potential investment in Snap Fitness. Which franchise do you believe is a better business opportunity? Explain your answer.
Part 2: Assume your team decides to invest in the business. Prepare a variable costing income statement in Excel using monthly projections for revenue and expenses. Include a list of assumptions used to support the numbers incorporated with the income statement. Calculate the break-even point in dollars and number of members. Calculate the margin of safety. Incorporate the results of your analysis with the paper.
Review the case study posted to the week five projects thread and write a paper between 1,000 and 2,000 words addressing the following:
Part 1, Sections 1-4: Respond to the questions incorporated with the case study.
Part 2: Assume your team decides to invest in the business. Prepare a variable costing income statement in Excel using monthly projections for revenue and expenses. Include a list of assumptions used to support the numbers incorporated with the income statement. Calculate the break-even point in dollars and number of members. Calculate the margin of safety. Incorporate the results of your analysis with the paper.
Format the paper consistent with APA guidelines. Submit the paper, spreadsheet,
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Explanation & Answer
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CVP and Break-even Analysis
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Affiliation
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CVP and Break-Even Analysis
CVP is a mathematical model used by managers in forecasting profits at various levels of
output. It shows the relationship between the selling prices, unit variable cost, fixed cost, and the
number of sales. In analyzing the relationship between cost, volume, and profits, a company
needs to classify its costs into either fixed or variable. The Total fixed costs ( Monthly operating
expenses + equipment lease + Fixed mixed costs = 4500+900+600 = 6000). Sales = members
multiplied to the contribution fee per each (315*24 = 7560). For the Variable costs = sales -fixed
costs (7560-6000 = 1560). For the Variable cost per member (1560/315= 4.9523).
Snap fitness construct a budget of the relevant range that they should spend no more than
$4,500 on operating and $900 to lease equipment. Mixed cost is equal to $600 per month plus
$1.00 per membership sale. But if Snap fitness fixed operating expenses of $4,500 per month for
production amount exceeds the current monthly expense then the operating cost will increase.
Fitness center
Variable cost
1. Electricity
2. Water
3. Payroll
4. Advertising
5. Cleaning cost
6. Training
7. Lease hold Improvements
Fixed cost
1. Rent
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2. leased equipment
3. Operating expense
4. Membership cost
Franchise fee
The margin of Safety is revenue that is left over after companies pay their variable costs
linked with producing the goods or services. The margin of Safety = Actual Sales – Break Even
Point. If the margin of safety is high, then there is a risk of business loss. The three forms of Cost
behavior are fixed, variable and fixed cost. Snap Fitness fixed cost is from general fixed
operating expenses, lease equipment, and mixed most each month. The cost behavior formula is
Y = fixed cost + variable + the production level. The cost behavior helps a business to plan and
control business cost.
The CVP is found by taking the price per unit and then multiplying it by the number of
units sold. The CVP analysis helps an organization to determine the changes in fixed and
variable cost, sales capacity and charges and how it affects that company’s profits.
Snap Fitness estimations of each establishment acquire $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) with a 315 member requirement to break even.
The basic CVP formula is the price per unit multiplied by the number of units sold, which
equals the sum of total variable costs, total fixed costs, and acc...