Acc_561_Cvp_and_Break_Even_Analysis

CVP and Breakeven Analysis ACC/561 Professor Jimenez June 11, 2012 CVP and Breakeven Analysis Introduction When you invest in an already created business model, you can have confidence the business will be successful if you work hard and follow the franchisors instructions. Franchised businesses typically have a proven track record of success, and can support nationwide expansion. The same opportunities are the reason why the Snap Fitness business model is attractive, especially if you dream of owning your own franchise business that is already a recognizable brand in the health and fitness industry. This paper will discuss the estimated amount of variable costs for Snap Fitness, along with explaining how to achieve the target income successfully based on calculations, take a look at what the five standard types of variable costs are for fitness centers, and lastly, deciding whether to invest in a franchise opportunity like Snap fitness based on research from other fitness centers. Achieving the Net Income Five Examples of Variables Costs for a Fitness Center Whether it is a small or large fitness center there will be costs associated with running the business. The owner or management of Snap Fitness is responsible for these costs. Variable costs are costs that vary in total directly and proportionately with changes in the activity level, or they are costs that remain the same per unit at every level of activity (Kimmel, Weygandt, Kieso, 2009). For Snap Fitness there are variable costs that are associated with running this facility. The first variable cost is supplies. These are directly linked to employees and number of clients within the facility. The more employees and clients, the more supplies will be needed. This can be controlled if the employees try to use the supplies wisely and not waste what could be saved. Towels, shampoo, and soap are examples of supplies that will fluctuate, depending on the number of members. Also, the more employees the center has, the more staff uniforms will be needed. It is estimated that the average variable cost of supplies will be $1,000 per month. The second type of variable cost for Snap Fitness is utilities; which can fluctuate with the use of the facilities. The more the lights are on, the more the cost of utilities will be more per month. Increased business might result in expanded hours, resulting in increased use of the lights, air conditioning and/or heating. Even if the hours are not expanded to accommodate increased business, increased use of powered exercise machines which will make the electric bill increase, and more people in a room will make the air conditioner run longer to cool the facility. It is likely that the Utilities will also vary as a result of the seasonal changes in the whether. In addition, the facility might have ebbs and flows of membership around certain events and holidays. It is estimated that the average utility bill in the fall/winter will be $2,000 per moth and the average utility bill in the spring/summer will be $3,000 per month. The third type of variable cost is maintenance and repairs throughout the fitness center. The exercise machines are a significant capital investment for the managers of the fitness center. In order to protect this investment, and to keep their customers happy, it is imperative that the machines are safe and functional the majority of the time. Beyond the exercise machines, there are the upkeep and maintenance that is inherent in all brick and mortar businesses. Typical maintenance and repair issues include structural damage, plumbing problems, HVAC, and pest control. These maintenance and repair costs will vary depending on the age of the exercise machines and facility. The costs will vary from month to month but will likely rise over time as the equipment and facility depreciate. It is estimated that the average variable cost of maintenance and repairs to be $500 per month for the first year of operations. The fourth variable cost is labor and staffing of the fitness center. As the center gets more members, the management of the facility will have to hire new staff. Initially, Snap Fitness may operate with 10 associates. However, as more members join, they may decide to hire more staff. After the business dies down, they may need to make cuts. The employees will not always stay employees at the fitness center. There may be some employees who decide to leave, which will cause fluctuations in the employee count. Also the hours of the business may fluctuate depending on how busy it is. If they decided to try a 24-hour schedule, they will need more staff to cover the additional shifts. It is estimated that each employee will cost an average of approximately $1,000 per month in wages. This is with an average wage of $8 per hour, at 30 hours per week. With 10 employees, this is $10,000 per month. |Estimated Average of Variable Costs per Month | |Supplies | $1,000 | |Utilities | $2,500 | |Maintenance | $500 | |Wages |$10,000 | |Total |$14,000 | Anytime Fitness To evaluate whether an investment in a fitness company in the current market is an efficient investment, it is imperative to evaluate the market through fitness companies. One fitness company in the industry is Anytime Fitness. Anytime Fitness is a company in the health and wellness industry that sets itself apart from the competition in the aggressively growing industry by offering a competitive membership price, access to the gym anytime of the day, and programs that cater to member’s needs. Determining whether to invest in a franchise when the industry is growing rapidly is a difficult decision that rests on many factors. Anytime Fitness LLC. boasts on the franchise website, that the brand is a proven, thriving, and recession-resilient franchise opportunity (Anytime Fitness LLC, 2012). In addition, Anytime Fitness states that investing in an Anytime Fitness franchise is a low investment for potential franchise owners (Anytime Fitness LLC, 2012). Investing in a brand with proven results and evidence that the brand is imperative to ensure that the investment is a sound decision. Investing in a proven brand that is thriving and requires a low investment reduces the amount of risk associated with investments in franchises. In addition, the company’s industry research has indicated that their business model stands ahead of the rest in the industry as a result of technological systems, which includes remote monitoring of a closed circuit television system and personal safety devices that allows members to feel safe and secure, even when a club is not staffed. The high demand for fitness clubs, unique design that caters to the busy schedules of members, profitability, and low franchise investment would make Anytime Fitness an ideal candidate for a franchise. Conclusion In conclusion, when you open a franchise business you will have independence you are looking for as well as a support mechanism. Franchisors must have rules and guidelines that are designed to help you achieve success based on proven results, and the same will hold true for Snap Fitness. You have to take into account what the benefits and drawbacks of investing into any type of business. However, when you open a franchise business you will have the independence you are looking for as well as an already established support mechanism. You must have clearly identifiable rules and guidelines that are designed to help you achieve your desired success. By conducting research on the competitors in the industry currently, calculating and budgeting the amount needed to run the business for things like fixed and variable costs along with performing break even analysis you can have adequate information to determine whether the investment opportunity will benefit you or hurt you in the long run. Reference Anytime Fitness. (2012). Franchise information. Retrieved June 7, 2012, from http://www.anytimefitness.com/franchise-opportunities Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business Decision making (3rd ed.). Hoboken, NJ: John Wiley & Sons.