Snap Fitness Snap Fitness Economics Essay

As stated on the Snap Fitness website, it “understands that the current lending environment is a challenge – especially if you’re trying to finance a start-up business. That’s why the franchisor of more than 1,200 24/7 fitness centers worldwide decided to take it upon itself to help ease the stress associated with securing financing by developing a proprietary vendor finance program available through its primary equipment suppliers and preferred lenders (Strait, 2012).

Once financing is secure, it is crucial that a consistent and adequate amount of revenue is generated to ensure the life of the individual franchise. As of November 18, 2012, discovered through online research, an individual, annual membership at Snap Fitness varies from $29.95 to $39 per month. For purposes of this paper, an individual, annual, one-month Snap Fitness membership fee is an assumed price of $26, which does not include a yearly contract. From this point forward, mentioned numerical figures, in relation to costs and quantities will be those as stated in the “Broadening Your Perspective” (BYP197) exercise instructions (Kimmel, Weygandt, Kieso, 2009).

Using the figures provided in the BYP197 exercise, key data, such as the total monthly fixed cost of $6,000 is a given. Unknown figures, at this point, are the estimated amount of variable costs and monthly sales in members and dollars to achieve a target net income of $10,000 per month. Using a Cost-Volume-Profit (CVP) analysis will bring about those solutions.

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Cost-Volume-Profit Analysis (CVP)

CVP analysis, as it is sometimes known, is a way of examining the relationship between your fixed and variable costs, your volume (in terms of units or in terms of dollars), and your profits (Business Owner’s Toolkit, 2012). As a franchise owner, to maintain optimal use of facilities while focusing on maximizing profits, one should use a CVP analysis. In a CVP analysis, variable and fixed costs are itemized, which allows an owner a mathematical means to determine the profitability of an individual membership as it applies to overall profits.

Break-Even Analysis

Rosemary Peavler, in About.com, states:

“Once you know the fixed and variable costs for the product your business produces, or a good approximation of them, you can use that information to calculate your company’s breakeven point. A company’s breakeven point is the point at which its sales exactly cover its expenses. The company sells enough units of its product to cover its expenses without making a profit or taking a loss. If it sells more, then it makes a profit. On the other hand, if it sells less, it takes a loss (Peavler, 2012).

Presently, Snap Fitness maintains 300 members at a cost of $26 per, which equates to $7,800. Fixed costs amount to $6,000 ($4,000 in operating costs, plus $2,000 in equipment lease costs). To break even, the contribution margin must be $6,000, meaning the contribution margin must equal the total fixed costs, which is the break-even point. The variable cost is computed as $1,800 ($7,800 – $6,000). The above, in the form of an income statement would resemble, as follows:

Snap Fitness

Income Statement

Revenues:

Sales (300 memberships)

$7,800

Operating expenses:

Costs – Variable

$1,800

Costs (fixed) – Monthly Operating

$4,000

Costs (fixed) – Monthly Lease

$2,000

Total Operating Expenses

$7,800

Net Income

$0

Target Net Income

It is safe to presume that most “for profit” businesses do not remain in business to break even. Snap Fitness is not any different. To go from breaking-even, monthly, to earning a target net income of $10,000 per month, Snap Fitness must increase their membership from 300 to a target membership number of eight hundred.

Another term for target income analysis is target profit analysis. The equations and formulas that are to calculate a break-even point can also be used to calculate the number of units to be sold to earn a target profit. The procedure of calculating sales volume needed to achieve a target profit is known as target profit analysis (Cost Volume and Profit Relationships, 2012).

In order for Snap Fitness to determine a number of memberships that will allow a monthly profit of $10,000 (targeted sales), the following steps must be conducted:

Required sales in units must be computed. To calculate required sales in units, fixed costs and target net income must be added, then the sum divided by the contribution margin per unit, as follows: targeted sales in units = ($6,000 + $10,000) / $20 = 800 (memberships).

A contribution margin ration must be determined . Based on CVP analysis, the contribution margin ratio is, as follows: $6,000 / $7,800 = 76.92%.

Required sales in dollars must be computed. To do this, the sum of fixed costs and target net income must be divided by the contribution margin ratio achieved in step 2. above, as follows: ($6,000 + $10,000) / 76.92% = $20,800.

Variable Costs

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%. A variable cost may also be defined as a cost that remains the same per unit at every level of activity (Kimmel, Weygandt, Kieso, 2009). Knowing how much is variable cost out of total cost is fundamental to forecasting incomes generated by various changes in productions.

Therefore, total variable cost is in proportion to total expense (see Total Variable Cost graph below). The amount of variable costs associated with an individual, monthly Snap Fitness membership is $6. Not factoring future inflation, the variable cost remains $6 and is always the same no matter the number of memberships (see Variable Cost Per Unit graph below). Snap Fitness spends $1,800 for total variable cost per month. In the case of a Snap Fitness franchise, variable costs could be employee salaries, fuel costs, office supplies, equipment and facilities maintenance and repair costs, and staff training.

Franchise

Franchising is one way in getting into a business with the assistance and backing of an established company. There are several fitness-based companies currently in operation.

Curves is the first and largest fitness franchise. Established in 1995, it has become the tenth largest franchise in the world that focuses on women and weight-loss. Curves reached 1,000 locations in five years and in 2005, hit the 9,000 plus locations mark. An initial investment of a Curves franchise is $29,900 with a delivery of equipment cost of $3,000 – $5,000. The owner, at his or her expense must attend a training session in Texas. The franchise royalty is five percent gross revenues with $795 as the maximum monthly payment and $195 being the minimum. The advertising royalty is three percent of gross revenues, with $395 as the maximum monthly payment and $95 as the minimum (Curves Franchise – Start a Curves Franchise).

Anytime Fitness is a world leader in the 24/7 fitness market. This co-ed gym is accessible via a key fob locking system. This business was established in 1975 and in 2012, it is expected to open its 2,000th club. The initial franchise fee is $8,999 – $14,999 and the total investment runs between $30,074 and $292,574. The franchise royalty is a flat rate of $419 a month and not a percentage of sales (Anytime Fitness Franchise Review).

Snap Fitness Centers are accessible 24 hours a day with a key access card and offer state-of-the-art equipment, including cardio, strength, and selected equipment. In 2003, the business was incorporated. The initial term of the franchise is 10 years with an option for review for unlimited additional 10-year terms. The initial franchise fee is $15,000. The equipment package cost is from $12,000 to $68,000, depending on the size of the club. Royalties are six percent of total gross sales. Initial training expenses are $500 to $2,000. The total investment runs between $79,428 and $195,828 (Snap Fitness Franchise Cost and Fees).

Conclusion

Taking ownership of a franchise lessens many of the start-up requirements that come with the territory of being a new business owner. The basics are already set in motion. What remains is for the owner to fall-in on the business and take over. Granted, there may be a substantial investment cost, but being prepositioned may offset some of the inaugural pains incurred.

To give a new franchise owner a head-start, knowing the breakdown formulas to calculate cost volume profits and break-even points will put him or her that much ahead of the competition. More important, it will provide a mathematical analysis of what is required in order for the business to make a profit and, if not quite there, a way ahead. If present revenue is not adequate, an owner will know how to arrive at numbers that will assist him or her with predicting future earnings.

Snap Fitness as well as other franchises in other lines of business, afford an opportunity to manage a business whose model is already been structured and is prone to be well-supported because of the chain mentality to succeed. Having members of the franchise chain successful and healthy, in terms of profits and appearances, benefits all members in the franchise chain. Snap Fitness’ “less is better” motif, 24-hour daily operations, and very reasonable membership costs should continue to secure the niche it has found. Because similar businesses exist with similar business models, Snap Fitness must ensure that they keep innovation and safety at the forefront while providing offerings that their direct competition does not.

Keeping in mind the above and understanding fitness and vanity plays a huge role in the never-ending battle of the bulge, a franchise of the fitness sort appears to be a good risk to pursue.