Question
Case Study: In addition to regular gyms, nontraditional workout concepts and centers such as Kosama are increasing in popularity. Kosama is a franchise opportunity that
Case Study: In addition to regular gyms, nontraditional workout concepts and centers such as Kosama are increasing in popularity. Kosama is a franchise opportunity that offers members the opportunity to improve their health and fitness level. To learn more about the company visit kosama.com. Part 1, Section 1: Assume the following revenue and cost break-down. Revenue: -Monthly membership fee = $30. Costs: -General fixed operating expenses = $4,100 per month. -Equipment Lease = $395 per month. -Mixed costs are equal to $275 per/month (fixed) plus $1.10 per membership sale (variable). -Total variable costs are not known. -Estimated number of members required to break even is 330 members per month.
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.
Part 1, Section 2: Using the information from section 1. What would monthly sales in members and dollars have to be to achieve a target net income of $13,750 for the month? What is the margin of safety in dollars? Show your work and all calculations.
Part 1, Section 1: Use the following formula in order to determine total variable costs.
Sales - Variable Costs - Fixed Costs = Net Income.
Add the problem data to the formula and solve for the missing piece of the equation (i.e. variable costs).
1. Membership sales is equal to sales volume times the price per member.
2. Total variable costs is not known. Enter X in the above formula.
3. Total fixed costs are provided with the problem. Enter fixed costs in the above formula.
4. Net income at the break even is equal to zero. Enter 0 in the above formula for net income.
5. Solve the equation. X = total variable costs.
The above formula determines total variable costs at the break-even.
Part 1, Section 2: Use the solution from part 1, section 1 (i.e. variable costs) in order to calculate the contribution margin (i.e. sales - variable costs) on a per unit (member) basis. In addition to fixed costs, add targeted net income equal to $13,750.
Contribution Margin:
Sales: membership sales times the price per member
Minus Variable Costs: See solution in part 1, section 1.
Equals: Contribution Margin in dollars
Contribution Margin in dollars / number of memberships = contribution margin per member.
The next step is to determine what monthly sales in members and dollars has to be to achieve a target net income equal to $13,750 for the month? Utilize the CVP formula (fixed costs / contribution margin per member) to finalize the problem. Compute the margin of safety.
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