Cost Analysis

Part 1

Section 1

Given the Revenue is $28 for a month, fixed operating cost = $3975, equipment lease = $410, towel service = $50 per member based on volume, a mixed cost fixed for a month= $275, membership sale = $1.10 which is viable and the break-even needs members ranging from 255 to 275 according to (Kimmel, Weygandt & Kieso 2016).

Total fixed cost= fixed operating cost + equipment lease + mixed cost for a month

$3975 + $410 + $275 = $4660

The total monthly sales for 255 members shall be calculated by taking the monthly membership multiplied by the number of members.

$28 times 225 = $7140 sales.

The total monthly sales for 275 members shall be calculated by;

$28 times 275 = $7700 sales.

The total variable cost will be calculated by taking the sales subtract variable cost

Sales – VC – Fixed cost = 0

For 255 members

$7140 minus - $4660 = 0

Variable Cost = $7140 - $4660 = $2480

For 270 members

$7700 – VC – 4660 = 0

VC= $7700- $4660 = 3040 which is the variable cost

The contribution margins for 7140 sales and 7700 sales is calculated by

7140 minus 2480 = 4660 for 7140 sales

7700 minus 3040 = 4660.

After that we need to get the contribution margin per member for 255 and 275

4660 divided by 255 = $18

4660 divided by 275 = $17.

The break-even in sale for $7140 sales in dollars is calculated by taking the fixed costs divided by (total sales- total variable cost/total sales)

4660÷ (7140-2480/7140)

4660÷0.7 = 6657 which is the break-even point in dollars.

The break-even point in sales volume which is calculated for members

= the break-even point in dollars divided by the monthly members fees

= 6657÷28 = 238 members.

The break-even point in sales (dollars) for $7700 sales will be 4660÷ ($7700-$3040/7700) = $4660÷0.6 = 7767 which is the break-even in dollars.

The Break-even in sales for members (volume)

7767÷28 = 277 members.

SECTION 2

Sales in units are given by target profit plus fixed cost divided by price per unit then subtracts the variable cost per unit.

Since the Net Income for the target is $145000

Then the sales unit will be $145000 + 4660÷28 - $1.10

149660÷27 = 5543 sales in units.

We then take the margin of safety minus 255 members

$145000 minus $6657 = $138343.

To calculate the margin of safety for 275 members

$145000 minus $7767 = $137233.

FRANCHISES

A franchise is a contractual relationship where a business owner licenses the rights to an individual or company to sell the owner’s brand, to perform certain services or to use certain trade names or trademarks within another geographical area.

Snap Fitness Franchise

This company is privately owned and operated by the new owner having its headquarter at Chanhassen, Minnesota which talks like an entrepreneur. Minnesota has been ranked in the third position in the Entrepreneur Magazine that contains the list of “Top new Franchises” which brings out the clear relation of snap fitness with other fitness and franchise business in its mother company. Due to long distance travelling from more than 25 miles to reach the closet fitness enter thus triggered a decision to have a snap investment located in Ohio in line with two other fitness centers that I discovered after searching online, the two are called Anytime Fitness and the second one is called the Jazzercise (Anytime Fitness 2019). Some factors affecting the expense of these finesses centers since it is a new, unique and fresh investment include the location, the renovation extent needed to comply with the standards, decision to operate a center or as an express location. The monthly fee for anytime fitness is $49.99 per month while a fee of $407.99 is charged for according to (Jazzercise 2019)

a year. On the other hand Jazzercise was begun back in 1969 where its cost is depended upon the level one operates in the company for example teaching only costs $2500.

In its calculations, the snap fitness Franchise assumes the following according to (Snap Fitness 2019)

The location

The number of members

The member sale number

The membership fee of $48 which is an average of two fitness centers,

An estimate of 300 members to stay along the membership goals,

Total fixed cost = 500 plus 375 plus 600 = $9675.

Total monthly sales for 300 members = $48 times 300 members = $14400 sales.

Total variable cost will be 14400 – VC – 6975=0 thus becomes 14400 minus 6975 = 7425 which is the variable cost.

Contribution margin will be 14400 minus 6975.

Contribution margin for each member will be 6975 divide by 300 = $24.

Break-even in sales in dollars will be obtained by taking the total fixed costs divided by (total sales – total variable cost/ total sales), which is $6975/ ($14400 – 7425/14400) = 4650 which is the break-even point in dollars.

Break-even point in sales volume will be $4650/48 = 97 members.

SECTION 2

Target Net Income 145000

Thus sales unit = $145000 plus 4650/48 minus $1.10 = 5543 sales in units of $.

Finally the margin of safety for 255 members will be $145000 minus 4650 = $140350.

References