Reference no: EM131607180

Group yoga classes were the predominantly offered type and there were about 40 group yoga classes a week held in the Space studio and the Light studio.

Salt stretch classes were conducted in a salt cave within Verita. These salt stretch classes required prior appointment and a minimum of two clients. There was also a limit of five client maximum in the class. For each salt stretch class, SLS would pay Verita a minimum of $30 for rental of the salt cave and a maximum of $45, depending on the headcount.

For clients who preferred more individual attention or required therapy for injuries, SLS offered the option of private yoga classes. These classes require prior appointment and clients had the choice of one-on-one sessions or arranging to take these classes with a partner.

The average revenue that SLS earned each time a client visited a group class steadily increased from December 2012 to May 2013. In the first two months, the average revenue per client visit was $10. In the subsequent two months, this number had grown to $15. By April and May 2013, the average revenue per client visit was $21.

In the same six months, the average revenue per client visit to a private and salt stretch class was $130 and $70 respectively. (See Exhibit 1 - Number of Group Private & Salt Stretch Classes conducted monthly in 2013 and Exhibit 2 - Monthly Number of Client Visits for Group, Private & Salt Stretch Classes in 2013).

When SLS took over the yoga business in December 2012, Verita had six part-time yoga teachers (including Lynn and Sumei) who were paid on a per class basis. In the subsequent six months, SLS increased the number of yoga teachers to nine. Teachers in SLS were paid a flat rate per class, regardless of whether it was a group class, salt stretch class or private yoga class. The average rate for yoga teachers was known to be around $60 per class.

Current Issues and Challenges
In May 2013, SLS was running at only 30% to 40% of capacity. This meant that they had to (i) retain Verita's clients who had unfulfilled class packages at the point of their takeover, beyond these clients' existing commitments to the studio, and (ii) reach out to broader client segments and attract new clients. Due to Verita's unique location, which was off the main road, many of its clients drove cars. The free parking spaces in the complex offered an additional incentive for these clients. As the location of Verita rendered SLS less accessible to those who did not own cars, Verita started a shuttle bus service in April 2013 to shuttle clients to and from a nearby Mass Rapid Transit (Train) station. SLS paid an additional fee of $700 monthly to Verita for their share of this shuttle bus service.

Given the competitiveness of the yoga industry at that time, one of SLS's key challenges was retaining and attracting good yoga instructors. On top of quality classes was the scheduling of yoga classes. SLS had to offer a comparable number of weekly group yoga classes to competitor studios and to balance the needs of the different customer segments.

SLS considered promoting different styles of group classes tailored to more specific needs of different target customers (e.g. offering gentle yoga classes to attract older customers). To attract new clients, SLS considered working with DEAL.com to increase the public awareness of their studio and to encourage new clients to try out yoga classes at SLS. SLS was actively exploring the use of social media to promote SLS.

Ultimately, a business would only be sustainable in the long run if it could generate sufficient revenue in excess of the fixed and variable costs it incurred. It was crucial that SLS priced their classes competitively. Given that SLS had positioned itself as a boutique yoga studio, it needed to invest sufficiently in the maintenance and improvement of its service quality to be able to retain and attract new clients.

Assignment #1: Case Study - Space & Light Studios

Requirements:
Students are to form a team of 4 to 6 members for this assignment. In this group assignment, students are to submit a group report (word document 250-300 words minimum including references, diagrams and appendices) that demonstrates their application of the cost-volume-profit analysis, learnt during lectures, in the abovementioned case study.

Lecture materials used from week 1 to 2 may be applied in this group report.

Objective:
The main objective of this case study is to explore the application of management accounting in a small business setting. Students learn about decision making in a given business context and how management accounting tools can help the decision making process.

Required:

a) Evaluate the viability of SLS's business by estimating its profitability.

b) Conduct a break-even analysis of SLS.

c) Analyze which product offered (i.e. type of yoga class) is the most profitable, by considering cost allocation to individual products.