CVP and Break-Even Analysis ACC/561 – Accounting Wk 5 August 29, 2011 Snap Fitness Snap Fitness, a fitness business based in Minnesota, offers franchise opportunities. The opportunity comes with a start-up fee ranging from $60,000 to $184,000. The following items are included in the start-up fee: 1. Franchise Fee 2. Grand Opening Marketing 3. Leasehold Improvements 4. Utility and Rent Deposits 5. Training Many people dream of owning a business as opposed to working for another business. The benefits of owning a franchise is priceless if ran properly.
This paper will show an estimate amount of variable costs and monthly sales in members and dollars for Snap Fitness. Also included are five examples of variable costs and a summary about purchasing a franchise and the decisions that come along with it. Estimate Amount of Variable Costs A Snap Fitness franchise is estimated to incur fixed operating costs of $4,000 and $2,000 to lease fitness equipment. A newspaper article providing details about fitness centers like Snap Fitness states this form of business may only require 300 members to reach its break-even point.
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The cost-volume-profit, also known as CVP, analysis will assist Snap Fitness in determining the effects of changes of volume and costs on the business’ profits. The CVP analysis will help the new franchise apply appropriate profit planning. The CVP analysis determines profit by subtracting total revenue from total costs. The equation separates costs into variable and fixed. The equation coverts to profit = total revenue – total variable costs – total fixed costs.
The newspaper stated the average break-even point would be 300 members and each member pays a $26 monthly fee to attend a Snap Fitness center. The break-even point in dollars would be $7,800. With a minimum of 300 members the total revenue for the month is $7,800. The business has estimated total fixed costs of $6,000. To estimate the amount of variable costs Snap Fitness will incur the business must apply the CVP basic equation (Kimmel, Weygandt, & Kieso, 2009). Profit = Total Revenue – Total Variable Costs – Total Fixed Costs = $7,800 – Total Variable Costs – $6,000 $7,800 – $6,000 = $1,800 Variable Costs By applying the CVP analysis Snap Fitness has identified its total variable costs to be $1,800 per month. As illustrated in the estimated monthly statement below, Snap Fitness is expected to acquire a minimum of $7,800 in sales, variable costs of $1,800, a contribution margin of $6,000, fixed costs of $6,000, concluding in the break-even point of $0 net income. The CVP analysis helps management in the decision-making process to identify the relationship between costs and revenues and to seek forms to increase business health.
Another key benefit of the CVP analysis is its ability to help management reach the desired target net income for the end of the period because it clarifies the required amount of business needed to meet goals (Kimmel, Weygandt, & Kieso, 2009). Monthly Sales For Snap Fitness to be successful the company must set monthly sales goal for the company to achieve. These goals must be set so the company has a barometer to gauge if they will be able to have the cash flow to meet its financial obligations.
Another use of these goals is to measure if the sales crew is meeting performance levels. Snap Fitness needs to meet $17,800 in monthly sales to achieve their Target Net Income of $10,000. The income amount of $10,000 will enable the company to cover costs and make a profit for the investors. To make the monthly sales goal of $17,800 the sales team must sign-up and additional 685 new members. To find what the required sales are to meet the $10,000 goal the Target Net Income formula must be used. Required Sales = Variable Cost + Fixed Costs + Target Net Income 7,800 = 1,800 + 6,000 + 10,000 Examples of Variable Costs Most fixed costs are easy to plan for and estimate. Expenses such as rent, insurance, and monthly utilities are examples of fixed costs that the manager of any organization should be able to budget for accurately. A more difficult task is identify and planning for variable costs. Variable costs can change from month to month and sometimes cannot be planned for. For a fitness center or health club, the biggest and most ongoing variable cost to think of is maintenance and repair of the equipment.
To maintain quality, of the fitness equipment must be kept in prime condition at all times. Although monthly and routine checks of the equipment may be part of an employee’s responsibilities, replacing or repairing damaged equipment could be a cost that varies greatly from month to month. One way to try to reduce or manage this variable cost is to ensure equipment is inspected regularly and problems are being addressed while they are still small. Another variable cost to consider is continuing education and training for employees.
Like any business, it is important for those in the health and fitness field to stay on top of current trends in the industry. From time to time it may be beneficial and necessary for full-time employees to attend seminars or training sessions to expand their knowledge in the industry. This is a good example of a cost that would not be incurred on a regular basis, but should be budgeted for at least once a quarter. Two variable costs that organizations overlook are office supplies and fuel.
In every organization employees use office supplies. In many organizations fuel is needed for company vehicles and can add a huge cost to any budget. A final variable cost to consider is the extra cost related to employee turnover. One good thing about this type of business is that the manager could hire many part-time employees to cover the shifts. This reduces labor costs by not needing to provide insurance or other benefits to the employees. However, it could also increase employee turnover.
If the business experienced a situation where most of their part-time staff quit they could be in a bad position. Even for part-time employees, there is a cost associated with recruiting, hiring, and training. Managers should try to keep even its part-time employees satisfied at work by offering other perks in lieu of benefits and making sure employee satisfaction is at a high level to avoid some of these unexpected turnover costs. Summary of Franchise Information Before deciding to enter a franchise of this nature, significant research, and analysis is required.
Large amounts of essential information can be found on corporate websites. Through research it was discovered that the corporate office provides a large amount of beneficial support when deciding to purchase a franchise. First, one should consider the downside to owning a franchise. The largest negative aspect is the time and effort implemented into being a business owner. The information provided in this paper has addressed many of the financial fixed and variable costs but there is also the cost of personal time.
No one should own a franchise without seriously considering the commitment and responsibilities that are attached to the title of business owner. Of course, there are also many positive aspects to a franchise venture. Someone who is very interested in health and fitness would thrive in this kind of environment and is a quality many corporations are looking for to run its franchises. In addition, most corporations offer ongoing support once a person becomes a franchise owner. One of the benefits of owning a Snap Fitness franchise is the seminars and training sessions offered exclusively to owners.
Another form of support they offer is guidance on selecting real estate and location of the franchise. Everyone has heard the saying, “location, location, location. ” Snap Fitness will make sure its franchise owners are selecting the right location to be a success. Last, many corporations offer financing for the franchise purchase. As noted in earlier sections, the costs of maintaining a franchise of this type are relatively low as is the break-even point, so the time necessary to pay back the loan could be short.
The benefits of support and financing options provided by Snap Fitness offer a lucrative opportunity if the purchaser has the drive and motivation to put into the franchise to succeed. Conclusion Owning a business or franchise has pros and cons attached. According to Dahl (2011) the number one reason someone would own his or her own franchise is the ability to control his or her own destiny. This is true with Snap Fitness. This paper showed an estimate amount of variable costs and monthly sales in members and dollars for Snap Fitness.
Also included were five examples of variable costs and a summary about purchasing a franchise and the decisions that must be made. As with any business, the fitness business is risky, although with any risk come rewards. References Dahl, D. (2011). Top 10 Reasons to Run Your Own Business. Inc. Retrieved on August 28, 2011 from http://www. inc. com/guides/201101/top-10-reasons-to-run-your-own-business. html Kimmel, P. D. , Weygandt, J. J. , & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd ed. ). Hoboken, NJ: John Wiley & Sons