Break-Even_Analysis

Break-Even Analysis ACC/561 CVP and Break-Even Analysis A CVP Analysis will classify the cost as variable and fixed, and calculates a contribution margin. Information in the analysis is the total monthly fixed costs of Snap Fitness, which are $6,000. Monthly fixed Operating costs are $4,000 and leasing equipment costs are $2,000. The center charges a monthly fee of $26 with no contract. Management needs to retain 300 members to break-even The variable costs to break-even is $1,800. CVP Income Statement For the month Ended of June 30, 2012 Sales (26*300) $7,800 Variable Expenses -1, 800 Contribution Margin $6,000 Fixed Expenses -6,000 Net Income 0 Once the monthly break-even amount of $7,800 is determined, 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 is a good estimate for Variable Costs is $1,800 per month ($7,800 - $6,000). Variable Cost Fitness centers are great starter businesses as they are inexpensive to open and maintain as cost is based on location. Fitness centers have fixed costs that are correlated to its businesses structure. Building rental, insurance, and equipment rental are fixed cost. As far as variable costs are concerned, you have laundry services for the towels that must be washed after members use them after there workout. In order for the whole operation to work utility cost are considered a variable cost as based off usage of machines and members attendance. The fewer members showing up the fewer towels need to be washed and machines operated. If attendance is low for members and it continues to become a trend, wages may become a variable cost as personnel hours may be reduced r let go altogether. Many fitness centers have a snack shop that sells power bars and smoothies. If there were customers coming in and buying products consistently coming or not coming in to buy, the variable cost would be the restocking fee of the snack shop. In order to maintain administrative order, the fitness center needs to keep records and files of its members, financial records, and marketing and research. You need office supplies to keep up with all these tasks, but the office supplies are a variable cost due to the need to produce any documentation is based on customer representation at the fitness center. The Finances and Support of Ownership In beginning a business venture it is important to ensure that this is a business that you will really enjoy building, you have the necessary resources to get the business started and the support network to provide you the best opportunity for success. To decide if securing the curves franchise is a good idea, it is important to know what it will cost, but also how each franchise owner will be supported. In the fitness business you are in business for yourself, not by yourself, and this philosophy is extended to all owners. You are provided with tools such as the club development support program which gives support and insight to the daily process, the initial opening steps and training by expert club owners, to get you started. As a new owner, a weeklong training designed to help with the understanding of guest producing techniques, retention of members and other club essentials is provided. Each new owner is provided with a computer based program that gives tutorial and information on all club procedures and operational processes. As an owner he or she is provided continued professional support, computer based support via a website, which in addition to materials for daily club operations use; advertising resources, promotions and up to date training materials. Area directors provide a consistent link to Corporate, for answers and help as needed. In addition to the support system that is in place, there is also a financial requirement which varies based on the economic area of establishment, which is as follows, the standard cost of a fitness franchise is approximately $29, 900, with an additional cost of $2,000 - $3, 000 for delivery of gym specific equipment. This fee also includes charts, music, start-up forms, supplies and specialized training in club operations; other cost could include leasing the location, utilities, local advertising etc. An individual can also become a club owner by purchasing an existing club, which will already the equipment, staff, members and is established in the local community. The cost of purchasing a pre-existing club the price may be lower but the new owner will be responsible for a $2000, training free. In addition to the franchise fee, equipment, staff, training and advertising is establishing a new venture or purchasing a pre-existing club, monthly advertising and franchise royalties will be expected, which is 5% of the gross revenues, with a maximum payout of $795 and a minimum payout of $195 for the franchise and 3% for advertising no greater than $395 and no less than $95 per month. Conclusion When considering the idea of opening a new franchise, the potential owner must take into account the fixed and variable costs associated with the new business, how much money will be needed just to break even, and how he or she expects to generate this money. Of course, the owner will not want to break even every month, so it will be necessary to build up a clientele through advertisements, promotions, and word of mouth, as well as provide a satisfying experience to those customers in order to maintain their business. If the new owner does not properly research the requirements of the franchise, he or she could lose a great deal of money and also fail at building their own business. It appears that in order to start a new franchise for a fitness club, there is a great deal of support provided and the financial obligation does not appear to be overwhelming. While the new owner is responsible for paying out royalties and advertising fees, these activities are important for boosting the business and come back to benefit the owner. Therefore, opening a new fitness club franchise appears to be a good idea, based on the research.