Susan, a former dance major from NYA, was actively teaching dance and fitness classes after graduation at local studios and gyms. But then, COVID hit, and all the studios and gyms closed and remained closed for months or even years. Her entrepreneurial spirit, coupled with her need to find another source of income, led her to offer virtual fitness and dance classes to friends and former clients. Her virtual classes have really taken off and remain strong despite studios and gyms reopening. Up until now, she has offered the online classes on a donation basis. She is wondering if she can create a livelihood off this endeavor. She would like to continue to offer the virtual classes but know she needs put work into calculating the right price. Sarah has no idea where to start though, she was a dance major after all not an accounting major. She is hoping you can help with this task as well as provide her with some accounting and business recommendations.
Here is some of her cost data:
| Cost | Amount | |
| Teacher wage | $ 20 | per class |
| Website hosting fee | 15 | per month |
| Lease cost for video/computer equipment | 75 | per month |
| Video editor/website designer payment | 500 | per month |
| Rent on facility | 250 | per month |
| Advertising* | 60 | per month |
* Sarah spends three hours a month to update Instagram and Facebook posts.
Currently, susan offers 30 classes a month. All classes are pre-recorded and then posted to her website. Classes are 50-minutes in length. Patrons have access to any of the recordings, though Sarah does recommend new clients progress through the videos in the order they are presented. She is thinking when she turns this into a for-profit business, she would a monthly option for her customers. This monthly rate would allow customers to access all the month’s videos. Susan currently has 40 loyal customers and would like to earn $1,000 a month in profit to start.
Requirements:
Sarah has the following questions for you:
- What are Sarah’s variable costs? Fixed costs? How do you know?
- How does your answer in number 1, regarding Sarah’s cost structure, impact her business?
- What monthly price should she set for her customers?
- What is Sarah’s break-even point in customers? Do you think Sarah’s chance of reaching this many customers is reasonable? Prove your break-even point by preparing a Contribution Margin Income Statement.
- How many customers must Sarah take on to achieve her goal of $1,000 per month? Prove your answer with a Contribution Margin Income Statement.
