Acct 561 Snap Fitness Opportunity

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Snap Fitness Franchise Opportunity
ACC561
November 28, 2011
Dr. Zeneo Williams, Ed. D., CFM

Snap Fitness Franchise Opportunity
Cost-Volume-Profit Analysis
The Cost-Volume-Profit analysis (CVP) for Snap Fitness provides an evaluation of its profits as costs and volume changes. As the owner of a Snap Fitness franchise, decisions about selling prices, product mix, and maximizing the use of the fitness center depends on CVP. A CVP analysis classifies cost as variable and fixed, and calculates a contribution margin. Relevant information identified in the analysis is the total monthly fixed costs of Snap Fitness, which are $6,000. Monthly fixed operating costs are $4,000 and monthly lease equipment costs are $2,000. The fitness center charges $26 as a monthly fee with no annual contract and management needs to retain 300 members to break-even. The amount of variable costs to break-even is $1,800:

CVP Income Statement
For the Month Ended November 30, 2011
Sales ($26*300)$7,800$26
Variable expenses-1, 800 -6
Contribution Margin $6,000 $20 Fixed expenses-6,000
Net income 0
A break-even analysis for Snap Fitness will show the manager the point at which the company will realize no income but will suffer no loss. The process of finding the break-even point will help the company decide if they need to change their monthly fees, depending on the amount of variable costs incurred during the month: Sales=variable costs+fixed costs+net income at $7,800=$1,800+ $6,000+0 Snap Fitness should sell 300 memberships to break-even. In sales dollars, sales are $7,800. The contribution margin technique gives the company the number of memberships: Fixed costs/Contribution margin per unit=Break-even point in units at $6,000/$20=300 The contribution margin per unit tells the manager that for every membership they sell, Snap Fitness has $20 to cover fixed costs, and contribute to net income. Snap Fitness has $6,000 in fixed costs, and it must sell 300 memberships before it earns any net income. The contribution margin ratio is 77%: Contribution margin per unit/unit selling price=contribution margin ratio or $20/$26=77% Every $.77 of each sales dollar is available to apply to fixed costs and to contribute to net income. This ratio helps in determining the effect on changes in sales on net income. For example, if sales increases by $2,210, net income will increase to $1,700. Sales (385 memberships) $10,010$26

Variable expenses -2,310 6 Contribution margin $7,700 $20 Fixed expenses -6,000
Net income $1,700
Increasing Net Income
Various news outlets project Snap Fitness to break even if 300 members enroll in fitness programs, at a membership rate of $26 per month. Business analysts for Snap Fitness are encouraging an immediate strategy to increase net income to $10,000 per month with the intent of moving business revenue beyond the current break-even point of $0. Net income increase strategy execution is available through two avenues: 1. Increase Membership Pool

2. Increase Membership Fees
The initiative to increase the membership pool will satisfy business requirements to meet projected net income goals.
Net Income$10,000Projected Sales$24,470
Variable Costs$1,800Variable Cost$1,800
Fixed Cost$6,000Fixed Cost$6,000
Projected Sales$17,800Before Tax$16,670
Members ($17,800/$26=685)Tax Rate 40%$6,668
Net Income: $10,002 (941 members)
The strategy to increase memberships and sales for Snap Fitness is difficult, but obtainable. To increase net income by $10,000, Snap Fitness must develop a marketing campaign that will entice the consumer market to purchase a membership. One tactic is to retain monthly membership fees at...
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