In 2002, Gretchen Reeves and Michaela Hurd sisters took over the management of Hallstead Jewelers, which was established 83 years earlier by their grandfather and has become one of the largest jewelry and gift stores in the United States for its product diversity strategy, comprehensive range of commodities and brand name recognition among the same industries and customers. After sales became stagnant and profits started to slip since 1999, the sisters decided to change the location and start extensive and expensive renovations. Renovation and moving took most of 2005, while the sales condition was not optimistic as expected in 2006. Problems and Issues
The major problems of the business are falling sales, increasing costs and managers’ lack of knowledge of costs and cost behavior. According to the Income Statements and operating statistics, the cost function of the business(CF1) can be calculated by adjusting the average sales price and sales tickets in 2003 and 2004 (Y=5976+0.37X). After renovations, the new fixed costs increased by around $1641k (increasing part from 2004 to 2006 on salaries, rent depreciation and miscellaneous).Total cost in 2006 was $11117k and sales ticket was 6897, then calculate the new cost function(CF2):Y=7617+0.51X. Since the BEP unit=FC/ (SP-VC), the new BEP in 2006 would be 7324, higher than actual sales 6897, therefore the business had negative net income and margin of safety units(6897-7324=-427) in 2006. The falling sales may force the business to cut price to deal with the increased competition from same industries (e.g., Tiffany Co., online store like Blue Nile).The new store, 50% bigger than their old location, considerably increased the fixed costs (e.g., rent, depreciation, sales force, etc). Compared with its competitor Blue Nail, it has no advantage competition on costs as a physical store while Tiffany Co.’s International exploration should not be overlooked. The company did not respond to these changes and...
Please join StudyMode to read the full document