Cvp Analysis

Snap Fitness The unemployment rate in 2000 has more than doubled, and the urge for those unemployed to become business owners has taken precedence. As a result, Barack Obama and Joe Biden developed a plan for small business. The plan would result in the release of over one billion dollars to entrepreneurs that were looking to kick start their business venture (Barack Obama & Joe Biden, 2010).A franchise is “a form of business organization in which a firm already has a successful product or service enters into a continuing contractual relationship with other businesses operating under the franchises trade name in exchange for a fee” (Investor Words, 2011).

Currently Team A is looking to enter a franchise contract with Snap Fitness. Based out of Minnesota, Snap Fitness offers potential franchise owners the opportunity to start up their own fitness center for $60,000-$184,000.This initial investment covers the following pre-opening costs: franchise fee, grand-opening marketing, leasehold improvements, utility/rent deposits, and training (Snap Fitness, 2011). Better known as entities, forms of business organizations are used to weigh the pros and con’s of entrepreneurship. Additional factors such as taxes, legalities, and business related concerns should be considered. More important, how ones business can break-even or be profitable should be of utmost concern.

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This paper covers break-even analysis, fixed costs, and variable factors of Snap Fitness franchise ownership.CVP Analysis CVP analysis considers the relationship among volume or activity level, unit selling prices, variable cost per unit, total fixed costs, and sales mix. When managers know how costs will behave at specific levels of activity, they may prepare more accurate budgets as well as project how profitable products will be, it serves as an aid in making good business decisions. These statements are different from traditional statements in that they classify costs as variable or fixed and compute a contribution margin, the balance of revenue after deducing variable costs.The contribution margin is the amount that is available for fixed costs (Kimmel, etal, 2009).

Break-Even Analysis A break-even point is the point at which total revenues equal total fixed and variable costs. At this level of activity, the company’s net income is zero. When managers know the break-even point, they are better equipped to price products, both old and new. The break-even point can be computed by using the contribution margin (Kimmel, etal. 2009).

Snap Fitness has 300 members at a cost of $26; that is, $7,800 and the fixed cost is $6,000 ($4,000 plus $2,000 in equipment leases).To break even, the contribution margin has to be $6,000 because at the break-even point, contribution margin must equal total fixed costs. The variable cost is computed as $1,800 ($7,000 minus $6,000). The break-even point is 300 members as a result, the CVP Income Statement would be prepared as follows: 300 Members @ $26$7,800 Variable costs 1,800 Contribution margin$6,000 Fixed costs 6,000 Net Income -0- Target Net Income Target income analysis identifies the necessary sales level to achieve the targeted profit. The approach to solving this problem is to treat the “target income” like an added increment of fixed costs. In other words, the margin must cover the fixed costs and the desired profit” (Walther, 2012).

The target net income of Snap Fitness is $10,000 for the month. In order to calculate the required sales in units, the sum of fixed costs and target net income is divided by the contribution margin per unit. Required Sales in Units = ($6,000 + $10,000) / $20 = 800 memberships The computation of required sales is the sum of fixed costs and target net income, divided by contribution margin ratio.The contribution margin ratio based on the CVP analysis is $6,000 divided by $7,800 equals 76. 92%.

Required Sales in Dollars = ($6,000 + $10,000) / 76. 92% = $20,800 To achieve the target net income of $10,000, Snap Fitness needs to recruit 800 members and reach the sales quota of $20,800 for the month. Variable Costs Variable costs are “costs of labor, material, or overhead that change according to the change in volume of production units” (“Variable costs,” 2011). For Snap Fitness one of the most important variable costs to consider will be maintenance or repair of fitness equipment.It is important to address maintenance issues while they are small to avoid an increase in this variable cost.

The exercise and fitness industry is full of trends and ever constant change, it is important for all employees to be educated and properly trained. Training, exercises classes, and seminars are variable costs and may assist in the reduction of maintenance expenses. The most important variable cost that can never be determined is employee turnover. Out of majority of business the fitness industry has one of the highest employee turnover rates.Personal training is one of the most competitive markets of the fitness industry and are paid by how large their clientele is, or by what the given fitness center charges by hour.

If a fitness center is not performing well or attracting clients, the trainer may leave to a better performing establishment. Say Yes to Franchise (Snap-Fitness) The number of people who belong to health clubs or gyms has doubled in the last 20 years. This is largely in thanks to the Baby Boomers who have grown conscious of their health and physical fitness. The healthy club industry has proven to be recession-proof, averaging in 8% annual growth rate since the early 1990’s” (Snap-Fitness). 24/7 fitness centers have shown to be most profitable as their as a one-stop-shopping solutions for clients where they can also receive personal training, tanning and programs to help stretch their membership value even further.

This is a great market to get into. A franchise is also a great way to start a business as you receive “the support, service and training [which] is unparalleled” (Snap-Fitness).When you purchase a franchise, you are not only purchasing a model for success as explained in the above paragraph, but you are also purchasing a brand where Snap-Fitness or Anytime Fitness is a brand that has seen exposure over and over again. When you purchase a brand you also naturally acquire loyal customers. The minimum bid for opening a Snap-Fitness franchise is $76,113. That sum is a small down payment to receiving customers in a steadily growing industry.

Typical members pay roughly $26 a month for membership fees and it can be said that couples will usually buy memberships together.Since 24/7 facilities offer a solution to getting fit at any time of the day and night, it can usually be staffed with little to no people. Security and other options are helpful in giving the feeling of safety during the night to late-night customers and a smiling face during the day can help to great early birds and potential customers. A 24/7 facility has little expenses or overhead cost. Daily use and abuse from machines will occur and material can be directly purchased from the franchise.