CVP and Break-Even Analysis
ACC/561 - Accounting Wk 5
August 29, 2011
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
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. 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).
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
17,800 = 1,800 + 6,000 + 10,000
Examples of Variable Costs
Most fixed costs are easy to plan for and estimate....
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