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Hallstead Jewelers (Case Study1)

Accounting 2301
Managerial Accounting
Professor May
Spring 2013

By:

Madhur Mittal, Ishaq Rehman, Ying Wang and Bohan Li

Question 1

Breakeven is a point at which a company covers all its costs and its profit is zero. After reviewing Hallstead Jewelers Income Statement, operational statistics, and table 2 and 3, for fiscal years 2003, 2004, and 2006, we can see a slight change in the breakeven unit and dollar amounts between the fiscal year of 2003 when compared to 2004. At the same time we also examine a major change when comparing the breakeven points of the fiscal year 2004 to 2006. This can be seen in Tables 1, 2, and 3.

Hallstead Jewelers|
Income Statement|
For the years 2003, 2004, and 2006 (In thousands)|
 | 2003| 2004| 2006|
Total Sales| $8,583 | $8,102 | $10,711 |
Variable Costs|  |  |  |
Cost of Goods Sold| $4,326 | $4,132 | $5,570 |
Commissions| $429 | $405 | $536 |
Total Variable Costs| $4,755 | $4,537 | $6,106 |
Contribution Margin| $3,828 | $3,565 | $4,605 |
 |  |  |  |
Fixed Costs|  |  |  |
Salaries| $2,021 | $2,081 | $3,215 |
Advertising| $254 | $250 | $257 |
Administrative Expenses| $418 | $425 | $435 |
Rent| $400 | $400 | $750 |
Depreciation| $84 | $84 | $142 |
Miscellaneous Expenses| $53 | $93 | $122 |
Total Fixed Costs| $3,230 | $3,333 | $4,921 |
 |  |  |  |
Net Income| $598 | $232 | $(316)|
Table 1

Contributions per unit|
For the Years 2003, 2004, and 2006|
 | 2003| 2004| 2006|
Number of Sales Ticket| 10153| 9967| 13063|
Value of Average Sales Ticket| $845.37 | $812.88 | $819.95 | Variable Cost per ticket| $468.33 | $455.20 | $467.43 | Contribution per ticket| $377.03 | $357.68 | $352.52 | Table 2

Breakeven |
 | 2003| 2004| 2006|
Breakeven Units| 8567| 9318| 13959|
Contributed Margin Ratio| 0.446| 0.440| 0.430|
Breakeven Dollars| $7,242,186.52 | $7,574,745.02 | $11,446,000.22 | Table 3

The breakeven unit difference of the year 2004 when compared to 2003 is 751 sales tickets (unit sales) and the breakeven dollar amount difference between these years is $332,558.50. This results in a percentage increase of approximately 8.77% in terms of units and approximately 4.6% in terms of dollar amount. Similarly, the breakeven unit difference of the year 2006 when compared to 2004 is 4641 sales tickets (unit sales) and the breakeven dollar amount difference between these years is $3,871,255.20. This results in a percentage increase of approximately 49.80% in terms of units and approximately 51.11% in terms of dollar amount.

Margin of Safety |
 | 2003| 2004| 2006|
Units| 1586| 649| -896|
Dollars| $1,340,813.48 | $527,254.98 | $(735,000.22)| Percentage| 16%| 7%| -7%|
Table 4

Margin of Safety is the quantified amount by which the actual sales can fall before a firm starts to incur losses. In the case of Hallstead Jewelers the margin of safety has been dropping every financial year, with reference to table 4. This indicates that the profit made my Hallstead Jewelers is also dropping every year. By looking at the break even table we can say that Hallstead Jeweler made profits in the year 2003 and 2004, but made losses in the year 2006.

An increase in the break-even point and decline in the margin of safety are not good indications for any firm, as this clearly shows that the firms’ costs have been increasing and at the same time it has been loosing business. The reason for Hallstead Jewelers having an increase in the breakeven point and a decline in the margin of safety is an increase in the fixed cost over a period of time. The reasons behind this increase in fixed costs include relocating to a new location, hiring of new staff, and remodeling of the...
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