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CVP and Break-Even Analysis

Student
ACC/561
July 06, 2015
Instructor

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CVP and Break-Even Analysis
Today, people focus on living and eating for a healthier lifestyle. One of the fastest
growing businesses in the United States is the health industry. Business owners are investing and
purchasing fitness franchises that offer low-cost membership as well as convenient hours. Snap
Fitness is one of those franchises that have over 1,400 locations worldwide. One of the reasons
that Snap Fitness would be beneficial to invest in and alsoand to purchase is because it is a
growing industry. Economically, the health club industry has proven to be recession-proof, as
health-minded consumers continue to look for a high-quality workout solution that provides the
best value for their buck. (Snap Fitness, 2015) Snap Fitness provides an in-house financing to
applicants that qualifiedqualify. Snap Fitness has a team that will help individuals navigating the
financial process and alsoand create goals to be successful. There are a lot ofbenefits of opening a
Snap Fitness franchise. One benefit is the low-cost startup cost that customers will find affordable
and turn them into loyal customers. The franchisor even provides the equipment needed to have a
successful business.
CVP Analysis
Numerous businesses use Cost-Volume-Profit (CVP) to find the break-even point. The
break-even point is when the costs of operations are 100% met by the amount of sales of a given
product. At the break-even point, the company has no income or loss based on the costs and sales
of the product. To understand the working relationships between cost, volume, and profit in an
organization, managers use the CVP. The CVP deals with how the changes in fixed costs, variable
costs, and the selling price (per unit) for Snap Fitness affect the operating profit. CVP makes the
supposition that all costs are either fixed or variable. The CVP presumes the fixed costs, the
variable costs, and the sales price per unit are constant too. Additionally the CVP theorizes the
selling of all products produced. The basic formula used in CVP is: price per unit multiplied by

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the entire number of units produced and sold is equal to variable costs per unit multiplied by the
quantity of units sold and produced plus the fixed cost plus profit. The contribution margin is the
amount that sales exceed variable costs. The unit contribution margin ratio is the amount that
sales excess exceed sales per unit minus the variable cost per unit.
With Snap Fitness, the fixed expenses are $6,000. The company must sell 300
memberships at $26 each to meet the break-even point. The calculation is 300 times $26. The
total of the companys costs is then $7,800 for a month. The costs, minus the fixed costs give the
result of the variable costs per month of $1800. With such information, a table can represent the
calculations mentioned that includes the information from Snap Fitness. Table 1 shows the CVP
analysis for Snap Fitness, including the Contribution contribution margin, variable cost, and other
relevant data necessary.
Table1
CVPAnalysisforSnapFitness

Snap Fitness
Target Net Income (TNI)
Required Sales to Reach Target Net
Income (RS)
Required Sales in Units to Reach
Target Net Income (RSU)
Monthly Fee-Without Annual
Contract (MF)

Formulas

$10,000.00
RS=TNI+VC+FC
RSU=RS/MF

$17,810.00
685
$26.00

Break-Even Point in Units (BEU)

Break-Even Point in Sales (BES)

Monthly

300
BES=MF*BEU

Fixed Costs (FC)

$7,800.00
$6,000.00

Total Variable Costs (VC)

VC=BES-FC

$1,800.00

Contribution Margin (CM)

Contribution Margin In Units Sold
(CMU)
Contribution Margin Ratio (CMR)

CM=BES-VC

$6,000.00

CMU=VC/RSU
CMR=CMU/RS

$9.00
34%

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With the CVP analysis in place, Snap Fitness can review the break-even point, adjust sales
accordingly to meet profit goals, and adjust prices. CVP is useful in determining what to
manufacture, and in what quantities. The CVP analysis is useful in monthly sales reports and
projections.
Monthly Sales
As the franchise for Snap Fitness wants a net income of $10,000, the membership will
need to maintain 685 members. The break-even point determined by 300 members is $7800. To
have $10,000 in net income the total required sales in dollars would need to be $17,810. To reach
$17,810 in sales, Snap Fitness needs to maintain 685 members per month at the $26 per month
unit price. Monthly sales (in members and dollars) determine what sales targets to set, how to
achieve a target net income, costs per unit, and other pertinent financial data. Monthly sales of
685 members can be a variable mix of new and current members to make the sales goals. Any
amount over 300 is profit, but not the target goal. Snap Fitness must maintain 685 members and
must monitor clients that start and drop monthly memberships to establish a base of customers.
The target of 685 minus the base will give the estimate of the exact target number needed in sales
of new memberships each month.
Variable Costs
Before deciding to invest in a fitness centercenter, the variable costs incurred will need
reviewing. The variable costs comprise expenses that vary in total with the level of activity. The
cost per unit remains constant, but the number of units may vary. An example would be labor. If
Snap Fitness has a variable cost per employee (the unit) of $15 an hour and the employee works
40 hours, that cost is $600. If an employee works 50 hours in a week, the labor cost changes to
$750. The variable cost idea models the future financial performance of a business, as well as to
set minimum price points. Variable costs differ from fixed costs such as rent, advertising,

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insurance and office supplies, which tend to remain the same regardless of production output.
Fixed costs and variable costs comprise total cost.
Billable labor is one of five main types of variable costs experienced by Snap Fitness.
Another variable cost associated with the employees includes sales commissions. The sales staff
earns commissions when transactions fully complete. Different amounts of sales results in variable
commission expenses for Snap Fitness. When a customer pays his or her membership fees, if he or
she pays with a credit card, there is a fee paid to the card company. This fee occurs when
customers use a card, therefore; the fee is a variable cost as well. Piece rate labor, where
employees pay is basedon the number of units produced, is another common variable cost. Direct
materials are variable costs as the expense of the materials charges when the products sell. Items
such as water and energy drinks are a variable direct material as the amount ordered will change
with each order.
In addition to the five main types of variable costs Snap Fitness experiences, a sale of
merchandise to customers is a variable cost. The merchandise can include products such as
clothing, health foods, sports drinks, and vitamin supplements. Different types of membership
levels with different pricing structures other than the $26 membership change monthly, adding to
the variable costs. Finally, the fluctuation of the utilities due to the weather or the season is a
variable cost for Snap Fitness. Snap Fitness is similar to other fitness franchises, with regard to
variable costs.
Anytime Fitness Franchise Information
More Anytime Fitness is a fitness club that has over 2 million members and provides 24/7
access to those wanting to get in and stay in shape. Many features make this fitness club attractive
to members, but there are also plenty of reasons that make it attractive to franchisees. Based off

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ofoff financial strength and stability, growth rate, and size of the system, Anytime Fitness is the
top global franchise by Entrepreneur magazine (Anytime Fitness, 2015).
Benefits of Franchising Anytime Fitness
A benefit to running and an Anytime Fitness is access to technology that makes running
the gym seamless. The company provides franchisees with top notchtop-notch security systems
that are also integrated with billing and payment processing. This means that members can access
the club when no staff is there and still make purchases and paymentsthere, still make purchases
and payments, and work out safely. The technology also means flexibility for franchisees time.
Requiring no additional staff leaves more time for a life outside of the business (Anytime Fitness,
2015).
The initial investment for Anytime Fitness is low. The total initial amount ranges from
$84,000 to $417,000, this number includes an initial franchise fee of $35,000 for new franchisees.
There is also an Anytime Fitness Express option whose startup fees are even lower. Other
companys startup costs can start at $150,000. The support doesnt stop at the low initial
investment cost; Anytime Fitness also provides continual support in real estate to ensure the
franchisee gets the best lease rate possible, franchise consultants help pick the best equipment,
insurance experts help pick the best insurance options, and because of how the business operates,
the company saves money on staffing and payroll because it doesnt take a large staff to run
(Anytime Fitness, 2015).
The benefits continue after the initial startup of an Anytime Fitness franchise. The
company provides manuals online that can help support franchisees throughout the different
phases of their business. Anytime Fitness provides training on a continual basis, including regional
training. Visits to the club to provide feedback are also a bonus along with the opportunity to

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shadow other Anytime Fitness franchisees to see what works for them. Anytime Fitness supports
its franchisees from beginning to end (Anytime Fitness, 2015).
Conclusion
According to the CVP analysisanalysis, owning a franchise would be both beneficial but
challenging. If costs and profits were always a set figure than franchise ownership would be an
easy choice for any entrepreneur or group looking to turn a profit. ButNevertheless, the variables
in owning a franchise make the decision to invest in a franchise much more complicated. Variables
such as location, competition, customer benefits and amenities are just a few challenges that can
face not only a franchise but businesses in general. Based on the information provided, investment
into the health industry seems to be profitable, timely and supportive. A preexisting business plan,
receiving help as needed when running the franchise and benefiting from group marketing are
positives for a franchise investment. ThoughHowever, some franchise requirements may require
the investor to buy all of their goods and services from the franchisor. AlsoIn addition, the
company may garnish a percentage of the investors profits as a royalty fee. Requirements may
include training fees for owners and the employees, and contributions to a fund for group
advertising. Nonetheless, after all of these considerations still the bottom line remains, are future
profits and market growth progressive in this investment. In this particular case, yes investment
into the health industry does prove to be both a profitable and growing venture.

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References
Investopedia (2015) Retrieved from http://www.investopedia.com/terms/c/cost-volume-profitanalysis.asp
Kimmel, P. D., Weygandt, J. J., Kieso, D. E. (2011). Accounting: Tools for business decision
making (4th ed.). Hoboken, NJ: John Wiley & Sons
Snap Fitness (2015) Retrieved from http://www.snapfitness.com/fitness-franchiseopportunities#why-own

Week 5 Learning Team Assignment CVP and Break-Even Analysis Paper and
Presentation

Students
Content
60 Percent

Points
Available
9

All key elements of the assignment are covered in the paper

a substantive way.
The paper addresses the following questions in
relation to Broadening Your Perspective All About
You Activity, BYP19-7 and includes the following:
An estimation of the amount of variable
costs
The number of monthly sales in members
and dollars that would achieve a target net
income of $10,000 that month
Five examples of fitness center variable costs
A summary of the franchise information
obtained on the Internet and a decision about
whether or not a franchise agreement would
be a lucrative idea
The corresponding 7- to 9-slide Microsoft PowerPoint
presentation with speaker notes illustrates the teams
solution to the assigned problem.

9/9
See comments
on sales
required to
reach a target
net income and
required sales
in units to
reach target net
income.

X
X
X

The content is comprehensive, accurate, and/or

persuasive.

The paper develops a central theme or idea, directed

toward the appropriate audience.

The paper links theory to relevant examples of

current experience and industry practice and uses the
vocabulary of the theory correctly.

The introduction provides sufficient background on

the topic and previews major points.

The conclusion is logical, flows from the body of the

paper, and reviews the major points.

Organization / Development

Points Additional
Earned Comments:

Points
Available

Good PPT
Presentation

Points Additional
Earned Comments

10
20 Percent

The paper is 1,750 ( 175) words in length, and it meets the

following requirements. (I exclude abstract, title page,
reference page, and any figures, charts, or tables.)

Team provided sufficient background on the topic

and previews major points.

The paper is logical, flows, and reviews the major

points.

Paragraph transitions are present, logical, and

maintain the flow throughout the paper.

The tone is appropriate to the content and

assignment.

Sentences are complete, clear, and concise.

See comments

Sentences are well constructed, with consistently

strong and varied sentences.

See comments

The presentation incorporates the following:

o

Slide transitions that are present, logical, and

maintain the flow throughout the presentation.

A tone appropriate to the content and assignment.

Mechanics
20 Percent

Points
Available
3

2.34/3

Points Additional
Earned Comments:
2.1/3

The paper meets the following requirements:

o Formatting or layout and graphics are pleasing to the
eye (font, colors, spacing, justification, and
indentation).
o The paperincluding tables and graphs, title page,
headings, and reference pageis consistent with
APA formatting guidelines and meets course-level
requirements.

See comments

o Intellectual property is recognized with in-text

citations and a reference page.

See comments

o Rules of grammar, usage, and punctuation are

followed.

See comments

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o Spelling is correct.

The presentation meets the following requirements:

o

Formatting or layout and graphics are pleasing to

the eye (font, colors, spacing, and indentation).

Citations of original works within the body of the

presentation and/or speaker notes are consistent
with APA guidelines

The presentation is laid out with effective use of

headings, font styles, and white space.

Rules of grammar, usage, and punctuation are

followed.

Spelling is correct.

X
Total
Total
Available Earned

TEAM A, the content of your paper and

PowerPoint presentation were good and
included all of the requirements from the
Content section of the grading rubric. I
included a few comments from the Content,
Organization/Development, and Mechanics
sections. Please review my comments, APA
6th edition, and the Center for Writing
Excellence for further guidelines and
information for use on subsequent
individual and team assignments.

15

13.44

Please see
the sample
paper in the
Tutorials &
Guides
section of
the Center
for Writing
Excellence
for detailed
information
about
correct
formatting.