Hallstead Jewelers

Topics: Variable cost, Revenue, Management accounting Pages: 10 (2281 words) Published: December 15, 2009
Hallstead Jewelers has been one of the premiere jewelers in the United States for 83 years. Located in the largest city in the tri-state area, the company has remained a family business since its inception. Up until 1999, the company had operated in the same location without the need to expand or relocate due to its superb reputation and loyal customer base. However, Hallstead Jewelers reached a point during that year when profits began to decrease and sales became stagnant. After a few years of this trend it became obvious to the owners that relocation was necessary. So in 2004 the owners, Gretchen Reeves and Michaela Hurd made the decision to relocate to a larger building in an effort to expand and grow the business. Since the new facility was only two block away from the original location, it was anticipated that there would be no loss of their loyal customer base. The owners also made the decision to expand the product line in hopes of increasing sales. However, the company faced stiff competition from large retailers such as Tiffany and Company and the internet business, Blue Nile. Unfortunately, the relocation did not produce the results that Gretchen and Michaela expected. Instead, revenue has continued to fall. An analysis was conducted to identify operating issues and to determine a course of action that would improve revenue and business profitability. Appendix A provides a detailed account of the company’s profitability for the years 2003, 2004 and 2006 respectively. Appendices C, D and E detail the impact upon company profitability based upon various levels of ticket sales during these same periods. The average ticket price fluctuated over these periods. An analysis of this information identified the following issues. OPERATING ISSUES

The following issues were identified:
*The company has failed to maintain pace with change in the landscape of businesses in the area. *Revenue and profits have continued to decrease.
*The company faces competition from other local businesses and internet businesses providing competing products.
1.The breakeven point in the number of sales tickets were $4616, $5032 and $7442 in 2003, 2004 and 2006 respectively. The breakeven in sales dollars were $7417, $7669 and $11,556 in 2003, 2004 and 2006 respectively.

Margin of safety were $1165, $432 and ($845) for 2003, 2004 and 2006 respectively. We can see a decline in the Margin of Safety and in 2006, the company began incurring losses. The lower margin of safety has increased the company’s risk of not breaking even. Sales were $8,583 million, $8,102 million and $10,711 million in 2003, 2004 and 2006 respectively, showing an increase of $2.6 million attributable to an increase in volume of product sold related to the new and redesigned location and product offering favorably received by their customers. The company also has increased its operating fixed cost in rent, salaries, commissions and other miscellaneous expenses causing the breakeven point to rise and the margin of safety to decline (See Appendix B).

2.One approach considered to increase business profitability is to reduce sales price. It is anticipated that a 10% reduction in price would increase the number of tickets sold to 7500. Appendix F provides a detailed analysis of how profit would be impacted by the price reduction. With this approach, the company would have to sell a total of 7,583 items at an average price of $1,397.70 to break even. This represents an increase of an additional 141 items that must be sold at the reduced price to reach the break even point.

3.According to Gretchen’s Grandfather and Father, sales commissions has been a key reason for the company’s success. However, Gretchen has the idea of eliminating sales commission. According to Appendix G, if sales commissions were cut, the breakeven point in sales volume would decrease by $1,116.72. This could possibly affect the growth...
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