Cvp and Break Even Analysis
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CVP and Break-Even Analysis
Snap Fitness – Estimation of Variable Costs
Understanding the different costs associated with a business is essential to running and maintaining it. Each location of Snap Fitness will incur monthly estimated fixed costs of $4,000 for operating expenses and $2,000 to lease the fitness equipment (Kimmel, 2009). Per the newspaper headlines, Snap Fitness will only need to provide service for 300 members to reach its break-even point (Kimmel, 2009). To obtain a membership at Snap Fitness, each person is required to pay $26 per month. When calculating the break-even cost for Snap Fitness, Snap Fitness must multiply $26 by 300 to reach its break-even cost of $7,800. Given this information, Snap Fitness needs to collect $7,800 before the business will return profit. After the break-even point has been determined, Snap Fitness can calculate its variable costs.
The formula used to determine a companys variable costs is Sales = Variable Costs + Fixed Costs + Net Income. The break-even point is determined when the Net Income is equal to zero (Kimmel, et al., 2009). Because Snap Fitness is needing to determine the variable costs, the formula needs to be written as Variable Costs = Sales – Fixed Costs – Net Income, therefore, Variable Costs = $7,800 – $6,000 – $0. This calculation tells us that the estimate for Snap Fitnesss monthly variable cost will be $1,800.
Snap Fitness – Monthly Sales in Numbers and Dollars
To determine the required sales to achieve $10000 in target net income, the components will have to be broken into cost per unit. In the break-even analysis, variable costs are $1800, and when divided by the number of members (300) equals $6 per unit. Sales were $26 per unit, making the contribution margin $20 a unit (Contribution margin = Sales – Variable costs). To determine the required sales in units for $10000 in net income, add the desired net income to the fixed costs, and divide by the contribution margin ((Desired Net Income + Fixed Costs) / Contribution Margin = Required Unit Sales). For Snap Fitness, the formula would be ((10000 + 6000) / 20 = Required Unit Sales). Snap Fitness would need to sell 800 units or have total sales of $20800 (800*$26) to realize $10000 in net income.
Examples of Variable Costs
The variable costs change with the change in the volume of production. These costs are hence difficult to estimate and plan for. Several costs in a fitness center are variable.
The first variable cost is the cost of cleaning and disinfecting the equipment and workout area after a customer has left. This cost is variable because it increases with the number of customers who use the facility. The second example is maintenance and equipment repair. Keeping the equipment in prime operational condition at all times will ensure customers receive the greatest benefits during their workout. Additionally, proper maintenance will ensure the longevity of the equipment. Although monthly and routine checks of the equipment may be part of an employees responsibilities, replacing or repairing damaged equipment could be a cost that varies greatly from month to month.
The third variable cost is the use water and electricity costs. With the use of shower, the additional use of water, toiletries, and laundry cost of towel change in proportion to the activity of a business. Electricity cost varies with lighting and equipment use. A higher cost of electricity is incurred only when a person uses the equipment.
The fourth variable cost to consider is continuing education and training for employees. Like any business, it is important for those in the health and fitness field to stay on top of current trends in the industry. From time to time, it may be beneficial and necessary for full-time employees to