You have just started work for a small company, FitCo, that develops private fitness clubs in small towns. FitCo buys or leases a local hotel or motel, then renovates to provide a gym, swimming pool, sauna, Jacuzzi, and a small café where patrons can buy juices, smoothies, and other healthy snacks . FitCo only develops clubs in towns where it has no competitors. The main product is a one-month membership, which gives patrons unlimited use of the gym and other club facilities. So far FitCo has opened 24 such clubs in different towns.
Your new boss, Sarah, gives you a copy of an Excel spreadsheet containing data collected last year on FitCo’s 24 existing clubs. She asks you to use the data to complete the following important and time-sensitive tasks
How do you calculate the following?
1) For Town H and Town W determine whether the price charged last year was above, below or equal to the profit-maximizing price.
5. FitCo is considering opening a 25th club. The company must choose between one of two towns in which to locate the new club. Both towns have populations of 22,000. However, one of the towns has a relatively high average income of $60,000, while the other has a relatively low average income of $45,000. The annual fixed costs of running the club in the high income town would be about $160,000, while annual fixed costs of running the club in the low income town would be about $70,000. Your job is to select the site for the 25th club and to determine the appropriate price for the one-month memberships.
To determine whether the price charged last year was above, below, or equal to the profit-maximizing price for Town H and Town W, you need to compare the price charged with the profit-maximizing price for each town. Since the profit-maximizing price is not given, you will need to calculate it first.
To calculate the profit-maximizing price, you need to consider the demand and cost data for each town from the Excel spreadsheet. The profit-maximizing price occurs when the marginal revenue (MR) equals the marginal cost (MC) of providing the service.
Here are the steps to calculate the profit-maximizing price:
1. Calculate the total revenue (TR) for each town:
TR = Price * Quantity
2. Calculate the marginal revenue (MR) for each town:
MR = Change in TR / Change in Quantity
3. Calculate the total cost (TC) for each town:
TC = Fixed Costs + Variable Costs
4. Calculate the marginal cost (MC) for each town:
MC = Change in TC / Change in Quantity
5. Determine the price charged last year for each town.
6. Compare the price charged with the profit-maximizing price:
- If the price charged is higher than the profit-maximizing price, it was above the profit-maximizing price.
- If the price charged is lower than the profit-maximizing price, it was below the profit-maximizing price.
- If the price charged is equal to the profit-maximizing price, it was at the profit-maximizing price.
Repeat these steps for both Town H and Town W to determine whether the price charged last year was above, below, or equal to the profit-maximizing price for each town.
Now, moving on to selecting the site for the 25th club and determining the appropriate price for the one-month memberships:
1. Calculate the contribution margin for each town:
Contribution Margin = Price - Variable Costs
2. Calculate the breakeven quantity for each town:
Breakeven Quantity = Fixed Costs / Contribution Margin
3. Calculate the revenue required to cover the fixed costs for each town:
Revenue Required = Fixed Costs + (Variable Costs * Breakeven Quantity)
4. Calculate the profit for each town:
Profit = Revenue Required - TC
5. Compare the profits for the high income town and the low income town. Choose the town with the higher profit as the site for the 25th club.
6. To determine the appropriate price for the one-month memberships, refer to the profit-maximizing price calculated earlier for the selected town.
To calculate whether the price charged last year for Town H and Town W was above, below, or equal to the profit-maximizing price, you will need to follow these steps:
1) First, you need to determine the profit-maximizing price for each town. The profit-maximizing price is the price that maximizes the profit for FitCo.
2) To calculate the profit-maximizing price, you will need to analyze the data in the Excel spreadsheet for the existing clubs. Look for information such as the number of members, the revenue generated, and the costs associated with running each club.
3) Calculate the profit for each club by subtracting the costs from the revenue generated.
4) Once you have the profit for each club, you can calculate the profit margin, which is the profit divided by the revenue. This will give you an idea of the profitability of each club.
5) Analyze the profit margins for the existing clubs in Town H and Town W. If the profit margin for a club in Town H is higher than the profit margin for a club in Town W, it suggests that the price charged in Town H was above the profit-maximizing price. Conversely, if the profit margin for a club in Town W is higher, it suggests that the price charged in Town W was above the profit-maximizing price. If the profit margins are similar, it suggests that the price charged in both towns was at or close to the profit-maximizing price.
6) Based on this analysis, you can determine whether the price charged last year in Town H and Town W was above, below, or equal to the profit-maximizing price.
To select the site for the 25th club and determine the appropriate price for the one-month memberships, you will need to consider the following factors:
1) Population: Evaluate the population of both towns. Both towns have a population of 22,000, but this is not the only factor to consider. You will need to consider other factors listed below.
2) Average income: Take into account the average income of each town. One town has a relatively high average income of $60,000, while the other town has a relatively low average income of $45,000. Higher income suggests that people may be willing to pay higher prices for memberships, while lower income suggests that lower prices may be more appropriate.
3) Fixed costs: Assess the fixed costs associated with running the club in each town. The high income town has annual fixed costs of $160,000, while the low income town has annual fixed costs of $70,000. Higher fixed costs mean that more revenue needs to be generated to cover expenses.
4) Market competition: Evaluate the level of competition in each town. FitCo only develops clubs in towns where it has no competitors. If one town has any existing fitness clubs or gyms, it may be more challenging to establish a profitable club there compared to a town with no competition.
5) Demand analysis: Consider potential demand for fitness clubs in each town. Look for any indicators or data that suggest people in one town have a higher demand or interest in fitness clubs compared to the other town.
Based on all these factors, you can make a recommendation for the site of the 25th club and determine the appropriate price for the one-month memberships. It is important to consider all relevant data and conduct a comprehensive analysis to make an informed decision.