Learning Team A
CVP and Break-Even Analysis Paper
When starting a business or buying a franchise it is critical for one to determine the star-up cost associated with the business. However, the most import item one must look at is the breakeven point. The breakeven point is important because it helps one plan out its activities to gives business owners an idea of the sales needed to cover its cost before one can make a profit. Within this paper, Learning Team A will examine the start-up cost and breakeven point for a Snap Fitness franchise owner. Variable Costs
“Snap Fitness estimates that each location incurs $4,000 per month in fixed operating expenses plus $2,000 to lease equipment, which brings at total of $6,000 in fix cost” (Kimmel, Weygandt & Kieso, 2009). However, in order for Snap Fitness to break even, it needs to have 300 members. With the “information provided above and our knowledge of CVP analysis, we will now estimate the amount of variable costs for Snap Fitness” (Kimmel, Weygandt & Kieso, 2009). The CVP analysis is important for Snap Fitness because “it is a critical factor in such management decisions as setting selling prices, determining product mix, and maximizing use of production facilities” (Kimmel, Weygandt & Kieso, 2009, p. 921). Variable cost “are costs that vary in total directly and proportionately with changes in the activity level. If the level increases 10%, total variable costs will increase 10%, and f the level of activity decreases by 25%, variable costs will decrease 25%” (Kimmel, Weygandt & Kieso, 2009, p. 914). However, according to Kimmel, Weygandt and Kieso “variable costs include direct labor, cost of goods sold, and sales commissions or a cost that remains the same per unit at every level of activity” (2009). The following information below provides one a snap shot of Snap Fitness’s CVP income statement in detail.
Fixed Costs: $4,000 per month
Operating Expenses: $2,000 per month
Monthly Fees: $26 per member
Minimum Monthly Members: 300
Total monthly expenses: $4,000 + $2,000 = $6,000
$6,000/300 = $20
$20 is the monthly break-even point because Snap Fitness charges $26 per month, $26 - $20 = $6.
$6 is the variable monthly expenses per member because with 300 members, $300 * 6 = $1800 a month is the variable costs for Snap Fitness.
In order for Snap Fitness to attain a target net income of $10,000 for a month, one must determine how many members are needed and the amount of income the members would bring in. Outlined below is the calculation to determine how many members to equal the monthly sales if the fixed cost at $6,000 for Snap Fitness is added to the desired target net income. |Statement of income for Verification of Breakeven sales: | | |Sales Revenue |$6,000 | |Variable cost |$2,0000 | |Contribution margin |$4,000 | |Fixed cost |$4,000 | |Net income at Break Even Level (Always Zero) |$0 | |Contribution margin ratio (4000/6000) |67% | | | | |Contribution margin for target net income of $10000 | | |(a) Fixed cost |$4,000 | |(b) Target net income |$10,000 | |(C) Contribution margin (a+b) |$14,000...