Cost-volume-profit and break-even analysis

Accounting

CVP Analysis for Snap Fitness

Snap Fitness is a no frills fitness center, with fixed operating expenses of $4,000 per month and the leases costing $2,000 per month, the total fixed or overhead costs are $6,000

It has been postulated by a newspaper that the break even the firm will only need a total of 300 members. Using this information the level of contribution that each member will make towards the fixed or overhead costs can be assessed and with knowledge of the membership fee the level of the variable costs can also be assessed.

To assess this it is necessary to understand the two types of cost; fixed and variable. Fixed costs are those which remain the same regardless of the level of production of the number of members (Horngren et al. 2008). Variable costs are the costs which are incurred for each unit produced, or membership provided. The revenue that is earned for each item will have to pay the variable costs. When the variable cots are accounted for, the remaining revenue will then contribute towards the fixed costs (Horngren et al., 2008). Once the fixed costs are covered the contribution per item/membership will provide for the profit.

The first calculation is to determine the contribution that each member will pay towards the fixed costs when there are 300 members. This calculation requires the addition of the fixed costs, which are then divided by the number of members. The calculation is shown in table 1.

Table 1; Fixed coast per member

Fixed operating expenses (a)

$4,000

Leases (b)

$2,000

Total fixed costs (a+b) (c)

$6,000

Break even point (d)

Fixed cost per membership (c/d)

$20

If the breakeven point is 300 members, the total fixed cost divided between the number of members gives $20, so the level of contribution for each membership fee is $20.

It is known that the membership fee is $26. Using this, the variable cost per member can be calculated, as shown in table 2.

Revenue per member (a)

$26

Fixed costs per member (b)

$20

Variable cost (a-b)

$6

If the membership fee is $26 per member, the membership fee, less the fixed cost (at the break even point) will give the variable cost per member.

The information in tables 1 and 2 can be used to assess the number of membership the Snap Fitness will need to sell each month if they wish to make a profit of $10,000 per month. As seen above, it is the contribution per unit that will initially pay for the fixed costs and then the profit. To calculate the sales needed for a predetermined profit level, the required profit should be added to the fixed costs. That total may then be divided by the contribution per members to give the number of memberships that need to be sold to achieve that level of contribution (Kinney and Raiborn, 2012).