Cvp and Break-Even Analysis

CVP and Break-Even Analysis

ACC-561

April 9, 2012

Tom Myers

CVP and Break-Even Analysis

Snap Fitness is a "no-frills", low-cost, workout center franchise. For $26 a month, a member can access Snap Fitness workout centers 24 hours a day. Analyzing costs associated with starting up a Snap Fitness franchise will help members of Team A understand the expenses involved with owning a business. The Team will first attempt to estimate variable cost using a Cost-Volume-Profit Analysis equation and associate variable costs with typical fitness center variable costs. Then, the team will figure target net income. Lastly, the team will find information about competitors and determine whether purchasing a Snap Fitness franchise is an economically sound idea.

CVP Analysis of Snap Fitness

Snap Fitness center is attempting to estimate variable costs by using the fixed operating expense information from each Snap Fitness location. Each location incurs $4,000 every month in fixed operating expenses plus $2,000 to lease equipment. Snap Fitness has learned that each site may only require 300 members to break even. Using the Cost-Value-Profit Analysis equation, sales = variable costs + fixed costs + net income, Snap Fitness is able to determine expected variable costs. Since Snap Fitness knows the number of units (members) needed to break even – 300 – the company can work backwards to determine variable costs. The total fixed costs equal $6,000. Since each membership is $26 per month, the company can expect to generate $7,800 with 300 members. Since fixed costs equal $6,000 and the break-even point is $7,800, the variable costs for each Snap Fitness location is $1,800.

Achieving a Target Net Income

The fluctuations in total Variable Costs are proportional to the number enrollees or members per month, but the Variable Costs for each member remain the same. Rather than breaking even, Snap Fitness would like to determine the memberships needed to achieve a target net income of $10,000 each month.

Using the same formula, Sales = Variable Costs + Fixed Costs + Net income

(Q members x $26 monthly fee) = (Q x $6) + ($4,000 + $2,000) + $10,000

Therefore,

$26Q = $6Q + $16,000 or $20Q= $16,000 or Q=800 members.

The sales in membership would be,

800 members x $26 = $20,800 for the month to achieve a net income of $10,000.

Examples of Variable Costs for a Fitness