Question

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 3: Respond to the questions included with the case study.

Part 1, Section 4: Assume you decide to invest in the franchise. Provide a description and estimates in dollars for monthly sales, variable and fixed expenses. Explain how you determined each number and provide a written list of assumptions.

Case Study:

Part 1, Section 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?

Part 1, Section 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.

Assumptions: Explain how you developed estimates for sales revenue and business expenses and list any assumptions.

Example:

1. Explain how you developed your monthly fee and volume estimates.

2. Discuss why you decided to rent or buy a building and the related costs such as rent per square foot based on, in part, the location of your business.

The key is to present the data in a professional manner so the end user (business owner, etc.) can review the numbers, understand it, and modify it in the future with little effort. If you use Excel add formulas so you can modify the data to account for changes in activity. This will help you manage your investment in the franchise. Example: What if sales volume is more or less than your original estimate? In this case you could change the sale volume (number of members) and sales revenue and variable expenses automatically change based on formulas in the spreadsheet.

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