Case Study Hallstead Jewelers

Topics: Variable cost, Costs, Fixed cost Pages: 5 (676 words) Published: December 3, 2014
Question 1
(Dollar values in thousands)

2003
2004
2006
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
Fixed Cost

Salaries
$2,021
$2,081
$3,215
Advertising
$254
$250
$257
Administrative Expenses
$418
$425
$435
Rent
$420
$420
$840
Depreciation
$84
$84
$142
Miscellaneous Expenses
$53
$93
$122
Total Fixed Cost
$3,250
$3,353
$5,011

Breakeven point in number of sales tickets
Breakeven Point = Total Fixed Cost / (Contribution Margin/ Units) 2003 = $3250 / ($3828/5341) = 4535
2004 = $3353 / ($3565/5316) = 5000
2006 = $5011 / ($4605/6897) = 7505

Breakeven point in sales dollars
2003 = breakeven point in units* price per unit
= 4535*$1607=$7287745
2004 = 5000*$1524=$7620000
2006 = 7505*$1553=$11655265

Margin of safety in %
2003 = (Budgeted Sales - Breakeven Point in Dollars)/ Budgeted Sales = ($8583000-$7287745) / $8583000 = 15.09%
2004 = ($8102000-$7620000) / $8102000 = 5.95%
2006 = ($10711000-$11655265) / $10711000 = -8.82%
From the calculations, the breakeven point in units of Hallstead Jewelers is increasing from 2003 to 2004; started from 4558360 to 7505070; while the breakeven point in sale dollars also increased from 7325284.5 to 11655373. The biggest possibility of the increase may be the moving and renovation of the store. The expansion attracted more customers and purchases to cover its increase of the costs. The margin of safety has declined a lot from 14.7% to -8.8%. The company kept losing money from 2003 to 2006.

Question 2
(Dollar values in thousands)

2003
2004
2006
Old Average Sales ticket
$1,607
$1,524
$1,553
New Average Sales ticket
$1,446
$1,372
$1,398
Sales ticket
7,500
7,500
7,500
New Sales revenue
$10,847
$10,827
$10,483
New Contribution Margin
$6,092
$5,750
$4,377
New Contribution Margin/Unit
$0.81
$0.77
$0.58
New Break-Even Point
4,013
4,355
8,640

If Hallstead Jewelers can actually reduce its price by 10%, and increase it’s the number of sales tickets to 7,500, their net income would increase for the year 2003 and 2004 because it has decreased from $4,558 to $4,013 and $5,000 to $4,335. There would still be a net loss in 2006 due to the increase of break-even point, which increased from $7,505 to $8,640.

Question 3
(Dollar values in thousands)

With Sale Commissions
Without Sales Commissions
Sales Tickets
6,897
6,897
Sales/Units
$1.55
$1.55
VC/Units
$0.89
$0.81
Fixed Cost
$5,011
$5,011
Breakeven Point (Units)
7,505
6,772

Elimination of sales commision would affect the break-even volume to decrease, since the selling staff would have a lower incentive to sell due to having a cut of their commision salary. Eventually, this process would see a decrease in profit, since there would be no longer same selling jewellery incentive as before when the staff was paid in commissions. Therefore we strongly recommend to management to maintain selling commissions to to allow for an increased motivation, which would see an increased in the profit.

Question 4
(Dollar values in thousands)

Without Advertising Increase
With Advertising Increase
Sales Tickets
6,897
6,897
Sales/Unit
$1.55
$1.55
VC/Unit
$0.89
$0.89
Fixed Cost
$5,011
$5,211
Breakeven Point (Units)
7,505
7,895

Increasing fixed costs (advertising) by $200,000 increases the breakeven point by $200,000. I would recommend some increased advertising but perhaps not as drastic as nearly doubling their advertising spending. They are a known and established store so they don’t have to advertise to get their name out there, but advertising their ‘new, bigger and better’ store is likely to increase sales.

Question 5
Because the fixed cost of year 2007 remained the same as it was in year 2006, therefore, we need to calculate the fixed cost in year 2007 firstly: Fixed Cost:...
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