Snap Fitness

In: Business and Management

Submitted By Frank9857
Words 1374
Pages 6
Snap Fitness Exercise Centers
12 May 2012

Part A & B –Variable Costs and Target Net Income Analysis
CVP analysis requires that all company costs be identified as variable or fixed. Investopedia defines variable costs as, “costs that vary depending on a company’s production volume; they rise as production increases and fall as production decreases”(pg 1). Fixed costs do not change with an increase or decrease in the amount of production. Snap Fitness’ fixed costs are $4,000 a month for operating expenses and $2,000 for the equipment lease (Total $6,000). The amount of members estimated to break-even is 300 at a monthly price of $26. To find variable costs, the equation is listed below:
(a) Break-even point = Variable costs + fixed costs + Net income 300*($26.00) = Variable costs + $6,000 + 0 $7,800 = Variable costs + $6,000 Variable costs = $7,800 - $6,000 = $1,800.
(b) What would the monthly sales have to be to achieve a target net income of $10,000.
(Fixed costs + target net income) / contribution margin ratio = required sales in dollars. Contribution margin ratio = contribution margin / sales. Contribution margin = Sales – variable expenses. $7800 – 1800 = $6,000 6000 / 7800 = 77% contribution margin ratio. ($6000 + $10,000) / 77% = $16,000/0.77 = $20,779
Based on the fixed costs provided, $20,779 in monthly sales would be needed to provide a net income of $10,000 per month.

Part C – Examples of Variable Costs
“Variable costs are expenses that change in proportion to the activity of a business.” (1) In the case of most fitness centers these costs are going to vary based on activity and usage. Variable cost are directives of usage, the more these items are used the more the variable cost will be for…...

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