What are some variable costs for a fitness center

Section 1: Suppose that Snap Fitness estimates that each location incurs $5,000 per month in general fixed operating expenses and $1,000 to lease equipment. Mixed costs are equal to $500 per/month (fixed) plus $1 per membership sale (variable). Total variable costs were not provided. A recent newspaper article describing no-frills fitness centers indicated that a Snap Fitness site might require only 320 members to break even. Members pay on a monthly basis. Using the information provided above, and your knowledge of CVP analysis, estimate the amount of variable costs. (When performing your analysis, assume that fixed costs include estimated monthly operating expenses, equipment lease and the fixed part of mixed costs.)

Section 2: Using the information from part 1, section 1, what would monthly sales in members and dollars have to be to achieve a target net income of $15,000 for the month?

Section 3: Provide several examples of variable costs and fixed costs for a fitness center. Discuss how a fitness center's cost structure, relevant range, margin of safety, cost behaviors, and CVP apply to the case study. How do you plan to use this in order to manage the business and plan for profitability? What type of internal accounting reports would you like to review in order to help you make informed decisions?

Section 4: Go to a competitor's internet site (Curves, Snap Fitness, or Anytime Fitness ) and find information about purchasing their franchise. Summarize the pertinent information required to make an informed investment decision. Which franchise do you believe is a better business opportunity? Explain your answer.

My Answer

Snap Fitness is a company that offers franchise opportunities that capitalize on the needs of consumers to provide an equipped and convenient place to exercise while saving them money and time by offering the option to add desired or remove undesired services. Within this paper, the prospect of operating and purchasing Snap Fitness will be considered by evaluating contribution margin income statements. Break-even analyses and cost-volume-profit (CVP) and the variable costs affiliated with a fitness center’s operation will be evaluated. Lastly, this paper will determine if the venture to open a Snap Fitness would be profitable and what steps should be taken to open a Snap Fitness franchise.

Section 1: Suppose that Snap Fitness estimates that each location incurs $5,000 per month in general fixed operating expenses and $1,000 to lease equipment. Mixed costs are equal to $500 per/month (fixed) plus $1 per membership sale (variable). Total variable costs were not provided. A recent newspaper article describing no-frills fitness centers indicated that a Snap Fitness site might require only 320 members to break even. Members pay on a monthly basis. Using the information provided above, and your knowledge of CVP analysis, estimate the amount of variable costs. (When performing your analysis, assume that fixed costs include estimated monthly operating expenses, equipment lease and the fixed part of mixed costs.)

[Cost volume profit analysis (CVP analysis) is one of the most powerful tools that managers have at their command. It helps them understand the interrelationships between cost, volume, and profit in an organization by focusing on interactions among the following five elements: (1) Prices of products (2) Volume or level of activity (3) Per unit variable cost (4) Total fixed cost (5) Mix of product sold.] (Accounting Management, 2012; Accounting Management, 2012)

Snap Fitness estimates that each location incurs $5,000 per month In fixed operating expenses plus $1,000 to lease equipment, $500 per month fixed and $1 per membership (variable)

Fixed cost = 5000+1000+500 = $6500

Using the equation

Sales = variable cost + fixed cost

Breakeven occurs at 320 membership

320*27 = variable cost + 6500

Variable cost = 8640-6500 = 2140

Variable cost per member = 2140/320 = $6.69 (this includes $1 per membership sale)

The variable costs that Snap Fitness faces can be controlled by monitoring the variable

expenses that Snap incurs each month. If Snap’s operating, expenses consist of a building lease,

electricity, water, and employees to run the operation. You can lower this cost by either lowering

the rent on the building, find more cost efficient ways to provide electricity to power the

equipment, or lowering the amount of employees you have on staff. You could also lower the

variable costs for the company by finding a cheaper vendor to lease your equipment. [Because

cost-volume-profit (CVP) analysis helps, managers understand the relationship among cost,

volume and profit it is a vital tool in many business decisions. These decisions include, for

example what products to manufacture or sell, what pricing policy to follow, what marketing

strategy to employ, and what type of productive facilities to acquire.] (Accounting Management,

2012) By using CVP analysis Snap Fitness will be able to set their price for membership,

determine the amount of employees they can afford to employ, and determine their breakeven

membership level for the month and year.

Section 2: Using the information from part 1, section 1, what would monthly sales in members and dollars have to be to achieve a target net income of $15,000 for the month?

For a profit of $15,000

Revenue – cost = profit

Revenue = 27x

Cost = 6.69x+6500

27x-6.69x-6500 = 15000

20.31x = 21500

X = 1058.59 or 1059 members

If $15,000 is the amount the franchise aims to meet as its monthly net income target, there would need to be a membership count of 1059 at $27 per membership. This would add up to a total income amount of $28,593. With the variable totals of $7084 (6.69 per unit and fixed costs of $6500, the desired net income of $15,009 is reached.