Introduction
Healthy living requires both mental rest and physical fitness. In the United States and other parts of the world, people engage in various physical activities to keep fit to avoid diseases such as obesity, heart diseases, diabetes-related diseases and dietary diseases. According to the Center for Disease Control and Prevention (CDC) annual report, these diseases affect approximately 40 % of the American population, with obesity being the leading disease among different groups of people. Intrinsically, both the states and federal governments have initiated various ways to prevent the public from such health conditions. One of the best ways recommended by the CDC is engaging in physical activities such as working out to keep fit. As a result, fitness centre and gym businesses have increased in number in different parts of the USA. As well, the number of enrolment in these facilities has risen over the past few years (Penner, 2016).
Part 1 section 1: Kosama Fitness Center
Kosama is one of the leading centres in the United States with many registered members. The business runs its activities independent and incurs all type of costs.
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Analysis Breakdown
Estimating the number of members
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Breakeven = |
Fixed Cost |
|
Contribution margin |
Contribution margin = selling price – variable cost
Calculation of fixed cost
| Fixed cost | |||
| General fixed operating expenses |
$3,975 |
||
| Equipment |
$410 |
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| Mixed cost |
$275 |
||
|
$4,660 |
|||
Variable cost
Monthly sales (255 members)
Monthly membership = $ 28
Total monthly sales = 255 x 28
= $ 7140 units
Monthly sales (275 members)
Monthly membership = $ 28
Total monthly sales = 275 x 28
= $ 7700
Total variable cost: Sales – variable cost – Fixed cost = 0
In case of 255 members
Total variable costs = $ 7140 – VC - $ 4660 = 0
Variable cost = $ 7140 –$ 4660
Variable cost = $ 2480
In case of 270 members
Total variable costs = $ 7700 – VC - $ 4660 = 0
Variable cost = $ 7700 –$ 4660
Variable cost = $ 3040
Contribution margin = selling price – variable cost
For 255 members = $ 7140 - $ 2480 = $ 4660
For 270 members = $ 7700 - $ 3040 = $ 4660
Break-even in sales (dollars)
For $7140 sales volume = total fixed costs / (total sales – total variable cost / total sales)
=4660 / (7140 – 2480) / 7140)
=4660 / 0.653
= $ 7136
Break-even point in sales volume (members)
= break-even point in dollars/ monthly members fees
= 7136 / 28
= 255 members
Break-even point in sales
For $7700 sales
=4660 / (7700 -3040) / 7700)
= 4660 / (4660 / 7700)
= 4660 / 0.605
= 7702
Break-even in sales volume (members)
= 7702/ 28
= 275 members
Part 1 Section 2: Margin of Safety
|
Sales in units = |
Target profit + Fixed cost |
|
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(Price per unit – Variable cost per unit) |
Targeted net profit = $ 145,000
Fixed cost = $ 4,660
Price per unit = 28
Variable cost per unit = 1.1
|
Sales in units = |
$ 145,000 + $ 4660 |
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(28 – 1.1) |
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|
Sales in units = |
$149,660 |
|
26.9 |
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| Sales in units = |
$5,563.57 |
Marginal safety = Sales in-unit - breakeven point in dollars
Marginal safety for 255 members
Marginal safety = $ 145,000 - $ 7136
MS = 137864
Marginal safety for 275 members
Marginal safety = $ 145,000 - $ 7702
MS = 137298
Part 1 section 3: Franchise investment
Cost structure, relevant range, the margin of safety, cost behaviors, and CVP can be used in a business venture in different ways. These particulars help in identification of the best investments and appropriate managerial styles to use in running a business. For instance, cost structure can be used to define the composition of capital required to run a franchise business. The cost structure of business comprises of the total cost, fixed cost and variable costs. The owner of a franchise business should aim at minimizing variable cost to reduce the cost of production. In doing so, it will assist in profit maximization for the business (Penner, 2016) .
On the other hand, the relevant range, the margin of safety, cost behaviours, and CVP can be applied in a franchise business to increase efficiency in cost changes. Relevant range, the margin of safety, cost behaviours, and CVP are used to ensure that all franchise activities are kept with the optimum levels that are bounded by a minimum and maximum amount. Keeping these particulars at optimum level help in reducing the cost structure of the franchise. Consequently, this can lead to an increase in organizational profitability (Penner, 2016). As such, the management of any franchise business needs to promote the application of these particulars in an organization to help inefficient cost management.
Part 1, section 4: Franchise Business
A franchise business is a conceptual association whereby the owner of a business license the legal rights of a company or an individual to carry out business activities in a different geographical region. Proper managerial activities of a business require an appropriate decision-making process to assist in the smooth running of organization activities.
Equinox Fitness
Health and fitness business has become one of the franchise to invest. Equinox Fitness is an example of one of the most prominent franchise businesses in the United States. The firm has recently boomed due to an increase in the number of registered members ( Stromgren, 2015) . Health and fitness services are currently on high demand by most people in the United States to reduce the risk of diseases such as obesity and heart disease. Equinox Fitness is san American franchised business operating in over 135 major cities in the United States, London, Canada and other countries.
Equinox Fitness franchisee business is an excellent venture to choose because it has a large number of customers daily. Therefore, a substantial initial investment amount of $155,000 can generate reasonable returns after a short investment period. The average membership fees range between $ 40 and $50; thus, the initial investment amount is enough to make more of the company's services ( Stromgren, 2015) .
Equinox Fitness Franchise estimates
The estimates of the franchise are based on the following assumptions:
Number of fitness centers
The number of registered members
The type of membership
The membership fee charged for each member is $ 45. If the facility has approximately 270 members who visit the center in a day, the total income of the facility will be $ 12,150. The cost of attending to members is considered as variables because it is bound to change. The fixed cost, in this case, include rent payables, leased items and other mandatory utilities (Stromgren, 2015).
Total fixed cost (Monthly) = rent + Leased items + license fees Mixed costs
Estimated Total fixed cost = $3,500 + $ 530 + $ 400
$ 4, 430
Sale estimation total monthly sales (members) for 270
Total sales = sales price x quantity
= $ 45 x 270 members
=$12,150 sales in dollars
Total variable cost: Sales – variable – Fixed cost = 0
Variable cost =$12,150 - $ 4, 430
Variable cost = $ 7,720 (in dollars)
References
Penner, S. J. (2016). Economics and financial management for nurses and nurse leaders. Springer Publishing Company.
Stromgren. E. (2015, June 15). Equinox Starts Franchising Blink Fitness Brand. Retrieved from https://www.clubindustry.com/profits/equinox-starts-franchising-blink-fitness-brand
