Reference no: EM132472296

Assume the following revenue and cost break-down.

Revenue:

1. Monthly membership fee = $28.

Costs:

1. General fixed operating expenses = $3,975 per month.
2. Equipment Lease = $410 per month.
3. Towel service = $.50 per member based on volume.
4. Mixed costs are equal to $275 per/month (fixed) plus $1.10 per membership sale (variable).
5. Total variable costs are not known.
6. Estimated number of members required to break even is between 255 and 275 members per month.

Question 1: Using the information provided 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.

Question 2: What would monthly sales in members and dollars have to be to achieve a target net income of $14,500 for the month? What is the margin of safety in dollars? Show your work and all calculations.

Question 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?

Question 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.

Question 5: You need to estimate/project sales, variable, and fixed expenses for your business. The first step is to determine a physical location for your 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.