Snap Fitness ACC/566 July 16, 2012 David Kochevar Snap Fitness Executive Summary Owning a business is a dream for many people and one way to obtain that dream is to take advantage of a franchise opportunity. Work-out centers are a rapidly growing business. “Economically, the health club industry has proven to be recession-proof, averaging an 8% annual growth rate since the early 1990’s across all health clubs and gyms”(Snap Fitness, 2012). The following paper will reflect information concerning owning a fitness center and benefits to an individual who seeks to own a business in this industry.
Individuals across the country who want to be fit often join fitness centers and most people want a no commitment month to month membership. Snap Fitness offers memberships such as this at a reasonable cost. The purpose of this paper is to describe Snap Fitness and identify cost-volume-profit analysis as well as break even analysis. Snap Fitness estimates each location will have $4,000 expense for fixed operating expenses and $2000 to lease equipment. In order for an individual looking to own a franchise such as Snap Fitness, in order to make a profit the business may only need 300 members.
The paper will provide an estimate of variable costs, monthly sales in dollars and members will be identified to determine what is needed to achieve a target net income of $10,000 for the month. Five examples of variable costs for a fitness center will be identified and discussed. Lastly, the paper will discuss summarized information concerning purchasing a franchise and will conclude with a decision whether purchasing a fitness franchise is a wise decision or not. CVP Analysis
CVP (Cost Value Profit) Analysis allows an investor to determine if an investment is profitable and at what point the total revenues are equal to the total costs (Kimmel, Weygandt, & Kieso, 2009). CVP are very basic analysis that provide a very quick and easy to ready snap shot analysis. CVP Analysis for Snap Fitness contemplates the connection between the volume of members of the fitness center, the monthly fee (no annual contract is needed), the variable costs encored, and the fixed costs. Snap Fitness will assess no sales mix as sales cannot be mixed when only one service is offered (Kimmel, Weygandt, & Kieso, 2009). Snap Fitness | |CVP Income Statement | |For the Month Ended June 30, 2012 | | |Total | |Sales (300 members X $26. 0 monthly fee) |$7,800 | |Variable costs |$1,800 | |Contribution margin |$6,000 | |Fixed costs (monthly operating expenses + equipment lease |$6,000 | |Net Income | $-0- |
Variable costs Variable costs are the operating cost that varies in direct proportion to the quantity of units either sold are produced (Kimmel, Weygandt, & Kieso, 2009). For the variable cost analysis it was assumed that the only fixed costs are the estimated monthly operating expenses of $4,000 and the equipment lease of $2,000 per month. In order to Break-even the Net income result for the below equation would be zero if the expenses and sales are equal. The newspaper assessed that the break even would be meet if 300 members paid a monthly fee of $26. 0 each. The newspaper theory was used to complete the sales data, but this data point should be considered a soft number as it is based off of a newspaper assumption. Break-even analysis uses the formula of Sales = Variable costs + Fixed costs + Net income (Kimmel, Weygandt, & Kieso, 2009). |Sales = |Variable costs + |Fixed costs + |Net income + | |$7,800 = |$1,800 |$6,000 |$0 |
Monthly Sales Snap Fitness is only able to be successful and profitable as a company if they set their monthly sales goals to achieve. The set monthly sales goals are crucially needed to be set to insure the company’s has the ability to barometer to gauge. This will allow the Snap Fitness to verify cash flow and meet all of the company’s financial obligations. Snap Fitness is also able to use the information to verify the sales team is meeting their individual and team goals and performance levels.
Snap fitness is required to meet $17, 800 in monthly sales to meet the target net income of $10,000. Income amount of $10,000 will insure Snap Fitness will be able to make a profit for the investors and cover costs. For the sales team to make $17,800 they will need to sign-up additional 685 new members. The required sales to meet the $10,000 goal the Target net income formula will need to be used. Required Sales = Variable Cost + Fixed Cost + Target Net Income $17,800 = $1,800 + $6,000 + $10,000 Variable Costs Examples Variable costs are costs that vary in total directly and proportionately with changes in the activity level. If the level increases 10%, total variable costs will increase 10%. If the level of activity decreases by 25%, variable costs will decrease 25%” (Kimmel, Weygandt, and Kieso, 2009, p. 914). Variable costs for this type of franchise will rise as members join. Utilities are variable costs and will fluctuate based on the amount of activity at the gym. Salaries for staff will also be a variable cost.
Personal trainers’ salaries will be different than a sales associate, for example. If the location offers health and wellness programs, a registered dietician will more than likely be employed at the location. A new gym will have less staff in the beginning as opposed to an established gym. As more members join, additional staff will be added to accommodate customers. Taxes and insurance will naturally fluctuate. Insurance is necessary to ensure the business has coverage in the event a customer is injured and to protect the building itself (damages, fire, accidents).
As the equipment is consistently used, repairs or replacements will be necessary. These repairs or replacements are a variable cost and will more than likely increase as the business grows and more customers utilize the facility and equipment. In relation to variable costs, business owners will find having knowledge of marginal distribution will help evaluate business performance. Marginal distribution can be calculated as follows: Marginal contribution = Marginal contribution per unit * Number of units sold Marginal contribution per unit = Selling price – Unit variable cost The marginal contribution is the difference between total revenue and totals variable costs and explains how changes the operating profit as changing the number of units sold” (Busan and Dina, 2009, p. 103) . Franchise Opportunities The decision to start a business can sometimes be very difficult due to all of the work associated with planning and implementation. Franchises opportunities are the happy medium to business ownership. A franchise is when an individual or a group has established a right to market a company’s goods or services within a specific area. In a franchise opportunity a rand/ image has already been established for a company as well as products. The owner(s) is required to pay an initial fee to start the business while a percentage of the monthly sales have to be paid back to the company. For example anytime fitness, McDonalds, and Subway are all example of franchise operations. Establishing a fitness center has a minimum initial contribution of $80,000 however if the owner(s) are military veterans discounts will be offered. The initial covers equipment, demographics help, a secure surveillance system, customer tracking data, and a well together fitness plan and package.
Snap Fitness also offers a financing program which helps with the initial investment cost. Once the agreement has been signed the franchisee is provided with all the benefits and perks. Training is also provided at the corporate headquarters and an advertising plan is in place to help attain new clients. The franchise fee is a set fee that does not increase with sales. Franchise’s make business ownership simplified because the leg work has been done already. However, the negatives are yes a percentage of the sales have to be sent to the franchisor.
Understanding the benefits of franchises compared to small business ownership will help make decisions easier about which operation works best. Conclusion As we see franchising a fitness center is a very beneficial investment for individuals or groups looking to operate a business. As an investor it is important to have a concept as to which ownership and entity type works best for them. The breakdown of the variable cost and the break even analysis gives great insight in regards to how the business would need to operate on monthly bases.
These key equations are imperative to business operation but it also helps predict future earnings as long as goals are achieved. A franchise opportunity has many perks with a limited amount of risk involved so understanding how things work is beneficial. Snap Fitness offers the ability to open a franchise with great support and package benefits throughout the whole process. Fitness and health is a great industry because American is trying to be more health conscience. References Anytime Fitness. (2012). Retrieved from http://www. anytimefitness. com/franchise-opportunities
Busan, G. , & Dina, I. (2009). Using cost-volume-profit analysis in decision making. Annals Of The University Of Petrosani Economics, 9(3), 103-106. Kimmel, P. D. , Weygandt, J. J. , & Kieso, D. E. (2009). Accounting: tools for business decision making (3rd ed. ). Retrieved from The University of Phoenix eBook Collection database. Snap Fitness (2011) About Snap Fitness. Retrieved from Snap Fitness (2011). http://www. snapfitness. com/corporate/about Snapfitness. com (2012). Fitness Franchise Opportunity. Retrieved from http://www. snapfitness. com/corporate/franchise-opportunities
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