Hallstead Jewelers Case

1. According to the Exhibit 1 provided in the case, we set up new income statement for 2003, 2004 and 2006 (see exhibit a). The variable cost includes cost of good sold and commissions, and the fixed cost cover other things include selling expense, salaries, advertising, administrative expenses, rent, depreciation, and miscellaneous expenses. Then the brief result shows in the table below.

2003
2004
2006
Break-even point in dollars (in thousand of dollars)
= Fixed cost/contribution margin ratio
$7,287.03

$7,620.20

$11,655.34

Break-even point in units (sale ticket)
= Break-even point in dollar/Sales per tickets
4535

5000

7506

Margin of Safety
= (Budgeted sales - Break-even point sales)/Budgeted sales
15.10%

5.95%

-8.82%

(Table 1. All the related data can be found in exhibit a.)
Both the break-even point in dollars and the break-even point in units increase a lot, and the margin of safety drops down to negative in 2006. The changes were caused by the huge increase in fixed cost (especially the rent since the bigger place they moved to in 2005).

2. If average prices were reduced ten percent and the number of sales tickets increased to 7500, the company’s income would be a net loss as $(1,109,410). And new breakeven point in sales would be 9633, and the new breakeven point in dollar would be $13,463,440. The income statement would be in the exhibit b.

Net Income/loss
(Thousand of dollars)
Break-even point in dollars (in thousand of dollars)
= Fixed cost/contribution margin ratio
Margin of Safety
= (Budgeted sales - Break-even point sales)/Budgeted sales
Hypothesis
Year
$(1,109.41)
13,463,440
9633
(Table 2. All the related result can be found in exhibit b)

3. Originally, the break-even point was 7505 units in 2006 (as shown in Table 1). However, if commissions were to be removed from Hallstead Jewelers, we would see our break even point decrease to 6723 units (rounded up to the whole unit).