Hallstead Jewelers Case Analysis

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Hallstead Jewelers
Managerial Accounting ACCT 2301 – Case Analysis 1
September 29, 2010
Melissa Ng

Variable costs are made up of cost of goods sold plus sales commissions. Fixed costs are made up of salaries, advertising, administrative expenses, rent, depreciation, and miscellaneous expenses. Assuming all questions are answered independently:

1. Income statement using the contribution approach:
| 2004| 2005| 2007|
Sales| $8,583,000 | $8,102,000 | $10,711,000 |
Less: Variable Costs| $4,669,000 | $4,456,000 | $5,998,000 | Contribution Margin| $3,914,000 | $3,646,000 | $4,713,000 | Less: Fixed Costs| $3,180,000 | $3,283,000 | $4,971,000 | Net Income| $734,000 | $363,000 | $(258,000)|

Sales per unit:
| 2004| 2005| 2007|
Sales Per Unit | $916 ($8,583,000/9,367) | $877 ($8,102,000/9,240) | $891 ($10,711,000/12,028) | Variable cost Per Unit | $498 ($4,669,000/9,367) | $482 ($4,456,000/9,240) | $499 ($5,998,000/12,028) | Contribution Margin Per Unit | $418 | $395 | $392 | Sales per unit = Total sales/Number of sales tickets

Variable cost per unit = Total variable cost/Number of sales tickets Contribution Margin per unit = Sales per unit – Variable cost per unit

Break-even points in units = Fixed cost/Contribution Margin per unit Break-even points in dollars = Break-even points in units x Sales per unit | 2004| 2005| 2007|
Break even in units | 7,608 ($3,180,000/$418) | 8,309 ($3,282,000/$395) | 12,681 ($4,971,000/$392) | Break even in dollars | $6,976,536 ($917 x 7,608) | $7,286,993 ($877 x 8,309) | $12,440,061 ($981 x 12,681) | Break-even point in number of sales tickets and break-even point in sales dollars increases from 2004 to 2005 and 2005 to 2007. This is due to the increase in fixed costs and the decrease in contribution margin, which overall results in an increase in break-even units, hence an increase in break-even dollars. Margin of safety ratio = (Budgeted sales – Break-even sales)/Budgeted sales | 2004| 2005| 2007|

Margin of safety | 0.19 ($8,583,000 - $6,976,536)/$8,583,000 | 0.10 ($8,102,000 – 7,286,993)/$8,102,000 | (0.16) ($10,711,000 – 12,440,061/$10,711,000| The margin of safety ratio decreases from 2004 to 2005 and from 2005 to 2007. This is because the margin of safety is calculated by subtracting the break-even in dollars from budgeted sales. The estimated sales are relatively close, however the break-even in dollars increases at an incremental amount each year, resulting in a decreasing margin between the two values. 2. New income statement using the contribution approach:

| 2004| 2005| 2007|
Expected units sold| 13,000| 13,000| 13,000|
Sales per unit| $824 ($916 x 0.9)| $789 ($877 x 0.9)| $802 ($891 x 0.9)| Sales| $10,712,000 ($824 x 13,000)| $10,257,000 ($789 x 13,000)| $10,426,000 ($802 x 13,000)| *Cost of goods sold| $6,003,843| $5,813,420| $6,020,120| Sales commission| $476,033| $455,844| $462,587|

Less: Total Variable Cost| $6,479,876| $6,269,264| $6,482,707| Contribution margin| $4,237,324| $3,991,636| $3,941,993| Less: Fixed cost| $3,180,000.00| $3,283,000.00| $4,971,000.00| Net Income| $1,057,324| $708,636| $(1,029,007)|

*The new cost of goods sold is calculated by dividing the original units of tickets sold by the original cost of goods sold, then multiplied by the new number of expected units of tickets sold. The company's income increases in both 2004 and 2005. In 2007, the company's income decreases significantly. The new break-even point in units and dollars:

| 2004| 2005| 2007|
Sales per unit | $824 | $789 | $802 |
Variable cost per unit | $498 ($6,479,876/13,000) | $482 ($6,269,264/13,000)| $499 ($6,482,707/13,000) | Contribution margin per unit | $326 | $307 | $303 | Break-even in units | 9,756 ($3,180,000/$326) | 10,692 ($3,283,000/$307) | 16,393...
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