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Case Study: Select **Show Replies** at the bottom of this
post to view more information and resources for advanced learning. Many of
you will own your own business. One rapidly growing opportunity is no-frills
workout centers. These types of centers attract customers who want to take
advantage of state-of-the-art fitness equipment but do not need the other
amenities of full-service health clubs. One way to own your own fitness
business is to buy a franchise. Snap Fitness is a Minnesota-based business that
offers franchise opportunities. For a very low monthly fee ($22, without an
annual contract) customers can access a Snap Fitness center 24 hours a day.
Start-up costs include pre-opening costs: franchise fee, grand opening
marketing, leasehold improvements, utility/rent deposits, and training.

Part 1, Section 1: Suppose that representatives from Snap Fitness estimate that each location incurs $3,975 per month in general fixed operating expenses and $410 to lease equipment. Mixed costs are equal to $275 per/month (fixed) plus $1.10 per membership sale (variable). Total variable costs were not provided. Representatives from corporate stated that a Snap Fitness franchise might require only 270 to 300 members per month to break even. Members pay on a monthly basis. Using the information provided above and your knowledge of CVP analysis, estimate the amount of variable costs. (When performing your analysis, assume that the only fixed costs are the estimated monthly operating expenses, equipment lease and the fixed part of mixed costs.) Show your work and all calculations

Part 1, Section 2: Using the information from section 1. What would monthly sales in members and dollars have to be to achieve a target net income of $13,500 for the month? What is the margin of safety in dollars? Show your work and all calculations.

Part 1, Section 3: Discuss how cost structure, relevant range, margin of safety, cost behaviors, and CVP apply to an investment in the franchise. How do you plan to use this in order to manage the business and plan for profitability? What type of internal accounting reports would you prepare? Why?

Part 1, Section 4: Assume you decide to invest in the franchise. Provide a description and estimates in dollars for sales, variable and fixed expenses. Explain how you determined each number and provide a written list of assumptions.

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**Part 1, Section 1**: Use the following formula in order to determine total
variable costs.

Sales – Variable Costs – Fixed Costs = Net Income.

At the break even point net income is equal to -0-. As a result, net income in the above equation is equal to -0-. Add the problem data to the above formula and solve for the missing piece of the equation (i.e. variable costs).

1. Membership sales is equal to sales volume times the price per member.

2. Total variable costs is not known. Enter X in the above formula.

3. Total fixed costs are provided with the problem. Enter fixed costs in the above formula.

4. Net income at the break even is equal to zero. Enter 0 in the above formula for net income.

5. Solve the equation. X = total variable costs.

The above formula determines total variable costs at the break-even. Variable mixed costs are included in the total. As a result, do not add variable mixed costs ($1.10 per member) to the formula. However, you need to add fixed costs ($275) to total fixed costs.

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**Part 1, Section 2**: Use the solution from part 1, section 1 (i.e. variable
costs) in order to calculate the contribution margin (i.e. sales – variable
costs) on a per unit (member) basis. In addition to fixed costs,
add targeted net income equal to $13,500. Utilize the CVP formula to
finalize the problem.

Contribution Margin:

Sales: membership sales times the price per member

Minus Variable Costs: See solution in part 1, section 1.

Equals: Contribution Margin in dollars

Contribution Margin in dollars / number of memberships = contribution margin per member.

The next step is to determine what would monthly sales in members and dollars have to be to achieve a target net income of $13,500 for the month? Don’t forget to add fixed costs to the CVP formula.

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**Resource – Enhance
learning & understanding**: For additional guidance
regarding cost volume profit analysis and related cost concepts please review
the following.

Cost Volume Profit– http://www.accountingexplanation.com/cost_volume_profit_relationship.htm

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**Franchise Agreement**: As you
review and analyze the franchise opportunity it is important to develop a
thorough understanding of the franchise agreement prior to investing. The
following is an article that explains the basic fundamentals of an
agreement.

Franchise Agreement – https://www.franchising.com/guides/the_franchise_agreement.html

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**Part 1 Section 4**: You need to estimate/project sales, variable, and fixed
expenses for your business. The first step is to determine a physical
location for your Snap Fitness franchise (i.e. city & state). Once
this is identified, begin researching what the average monthly fee is for
comparable fitness clubs in your area. The monthly fee per customer will
help you determine sales revenue. The next step is to estimate your expenses.
Do you plan to buy a building or sign a lease? Real estate is typically leased
based on square footage. How many square feet does your business require and
what is the cost per square foot based on the location of your business? In
addition to the lease expense, do you expect to incur additional fixed expenses
such as the purchase of fitness equipment? Finally, you need to determine all
of your variable expenses. This could include hourly wages, sales commissions,
utilities, etc.

**Assumptions:** Explain how
you developed estimates for sales revenue and business expenses and list any
assumptions.

Example:

1. Explain how you developed your monthly fee and volume estimates.

2. Discuss why you decided to rent or buy a building and the related costs such as rent per square foot based on, in part, the location of your business.

The key is to present the data in a professional manner so the end user (business owner, etc.) can review the numbers, understand it, and modify it in the future with little effort. If you use Excel add formulas so you can modify the data to account for changes in activity. This will help you manage your investment in the franchise. Example: What if sales volume is more or less than your original estimate? In this case you could change sale volume (number of members) and sales revenue and variable expenses automatically change based on formulas in the spreadsheet.

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