Learning Team B
University of Phoenix
August 14, 2011
CVP and Break-Even Analysis
Section A – Identification of Variable Costs
Identifying an estimate of the variable costs is relatively simple, provided that other information related to fixed costs and break-even amounts are available. We know from the text that Snap Fitness has fixed monthly operating expenses of $4,000. We also know that they have additional fixed costs associated with a monthly equipment lease. This brings the total monthly fixed costs to $6,000. The text also tells us that Snap Fitness has a break-even point of 300 members and we know that each member pays $26 per month for their membership. This brings Snap Fitness’ monthly break-even point to $7,800 (300 members x $26) (Weygandt & Kieso, 2009). Once the monthly break-even amount of $7,800 is known, the variable costs can be calculated by inserting the fixed costs and break-even amounts into the formula Sales = Variable Costs + Fixed Costs + Net Income. Break-even occurs when Net Income equals zero (Weygandt & Kieso, 2009). Therefore, Variable Costs = Sales – Fixed Costs – Net Income. Stated another way from a break-even point perspective, Variable Costs = $7,800 (Sales) - $6,000 (Fixed Costs) - $0 (Net Income). This tells us that a good estimate for Variable Costs is $1,800 per month ($7,800 - $6,000). Section B – Identification of Sales and Required Monthly Membership Once monthly variable costs are known, it is possible to calculate the required sales to bring net income to $10,000 per month. Required sales can be calculated using the same formula that determined variable costs. Knowing that Sales equals Variable Costs + Fixed Costs + Net Income, we can calculate the following information: •Sales = $1,800 (Variable Costs) + $6,000 (Fixed Costs) + $10,000 (Desired Net Income) = $17,800
Once we’ve determined that monthly sales would need to be...