Cost Volume Analysis is helpful to managers in decision-making activities such as setting prices, determining product mix, and maximizing the use of production facilities. (Kimmel, Weygandt, & Kieso, 2009) To begin Cost Volume Analysis of a potential new Snap Fitness site, the following data must be considered: (1) total fixed costs, (2) incremental variable costs, (3) monthly revenue per customer, and (4) and desired return on investment. Projected total monthly fixed costs are $6,000 — $4,000 in operating expenses plus $2,000 in equipment rental. The Snap Fitness monthly fee is $26 per customer. It is given that the target net monthly income is $10,000. The incremental variable costs must be calculated. Using the information acquired from the recent newspaper article, it was suggested that a Snap Fitness site might require only 300 members to break even; hence, the resulting incremental variable cost could be determined by using the following formula:
Total break-even revenue = Total variable cost + Total Fixed Cost + Net Income.
26 x 300 = 300x + 6000 +0 Solving the equation results in $1,800 of total monthly variable cost. Given the 300 members, a $6 monthly variable per customer is applicable. Having successfully calculated variable costs, it is possible to project the customer base necessary to achieve a monthly net income of $10,000. The following formula can be used:
Required sales= Variable Costs+ Fixed Costs + Net Income.
26x= 6x+ 6000 + 10,000
Solving the equation results in a required customer base of 800 members. Gross monthly income provided by 800 members would be $20,800. The gross monthly income would be applied as follows: $4,800 variable cost (800 members x 6), $6,000 total fixed costs, and $10,000 target net income. Contribution margin is “the amount of revenue remaining after deducting variable costs.” (Kimmel, Weygandt, & Kieso, 2009) For Snap Fitness, each customer’s monthly contribution margin would be $20. The contribution
margin ratio consists of the monthly contribution margin ($20) divided by the monthly customer fee ($26); for Snap Fitness, the contribution margin ratio is 77%.