CVP-and-Break-Even-Analysis

Many of you will some day own your own business. One rapidly growing opportunity is no-frills workout centers. Such 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 (\$27, without an annual contract) customers can access a Snap Fitness center 24 hours a day.

The Snap Fitness website (www.snapfitness.com) indicates that 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 (Sections 1 – 4):

Section 1: Suppose that Snap Fitness estimates that each location incurs \$5,000 per month in general fixed operating expenses and \$1,000 to lease equipment. Mixed costs are equal to \$500 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 320 members 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 fixed costs include estimated monthly operating expenses, equipment lease and the fixed part of mixed costs.)

FOR SECTION 1: ***Please 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).***

Section 2: Using the information from part 1, section 1, what would monthly sales in members and dollars have to be to achieve a target net income of \$15,000 for the month?

FOR SECTION 2: ***We need to 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 basis. In addition to fixed costs, add targeted net income equal to \$15K. In short, we need to utilize the CVP formula in order to finalize the problem. Finally, please review my comments regarding per unit basis above a second time. This is critical to solving the problem correctly. Otherwise, please let me know if you require further information or have questions regarding part 1, section 2.***