Case Study: Hallstead Jewelers

[# Question1]
Variable Costs = COGS + Commissions
Years 2003 2004 2006
COGS $4,326,000 $4,132,000 $5,570,000
Commissions 429,000 405,000 536,000
Variable costs $4,755,000 $4,537,000 $6,106,000
Contribution per ticket = (Sales – Variable costs) / # of tickets
Years 2003 2004 2006
Sales $8,583,000 $8,102,000 $10,711,000
Variable costs (4,755,000) (4,537,000) (6,106,000)
Contribution $3,828,000 $3,565,000 $4,605,000
# of tickets sold 5,341 5,316 6,897
Contribution per ticket $716.7 $670.6 $667.7
Breakeven point occurs when: Contribution per ticket = Fixed costs per units
Year 2003 2004 2006
Salaries $2,021,000 $2,081,000 $3,215,000
Ads 254,000 250,000 257,000
Adm. Expenses 418,000 425,000 435,000
Rent 420,000 420,000 840,000
Depreciation 84,000 84,000 142,000
Misc. Expenses 53,000 93,000 122,000
Fixed costs $3,250,000 $3,353,000 $5,011,000
Contribution per ticket 716.7 670.6 667.7
(1) Breakeven point (units) 4,535 5,000 7,505
Average ticket price $1,607 $1,524 $1,553
(2) Breakeven point (dollars) $7,287,019 $7,619,807 $11,655,380
Margin of safety = Sales – Breakeven (dollars)
Years 2003 2004 2006
(3) Margin of safety $1,295,981 $482,193 $-944,380
 (4) First, The slight decrease in contribution per unit and the larger increase in
fixed costs caused the breakeven point in both number and dollar increase.
Secondly, the decrease in sales price in 2004 caused the margin of safety fall sharply.
Last, the renovation brought heavy burden on fixed costs to Hallstead Jewelers,
which made the breakeven point rise sharply, so the margin of safety in 2006 turned
out to be negative.

[# Question2]
Years 2006 2006’ changes
Average ticket price $1,553 $1,398 - 10%
# of tickets sold 6,897 7,500 +8.74%
Sales $8,583,000 $10,485,000
(1) Net Income = Sales – Total expenses = Sales – (Variable costs + Fixed costs)
= $10,485,000 – [$6,106,000 * (1 + 8.74%) + $5,011,000] = $-1,168,093
Contribution per ticket = [$10,485,000 - $6,106,000 * (1 + 8.74%)] / 7,500
= $512.7
(2) Breakeven point (units) = Fixed Costs / Contribution per ticket
= $5,011,000 / $512.7 = 9,780 units
(3) Breakeven point (dollars) = $1,398 * 9,780 = $13,672,440

[# Question3]

New breakeven point in number = 6,723 (6,897)

New breakeven point in sales dollars = $10,440,192 ($11,655,380)
The elimination of sales commission caused the variable costs decrease.
Therefore, with the contribution per unit increase, the breakeven point in both
number and sales dollars dropped. When a firm is facing the problem of losing
money, we think that cutting down the costs to reduce the high risk of loss is more
important.
[# Question4]

The increase in advertising increases the fixed costs, so the breakeven point in both
number and dollars increase. As we discuss in question 3, when a firm is losing
money, we don’t recommend the firm to do any further risky investment, even
though the advertising might increase the sales, the breakeven point has already
become higher. We should do more research and evaluate the effect of investments
before we make the decision.

[# Question5]
The breakeven point in sales dollars = $1,553 * 7,505 = $11,655,265
Average sales price = $11,655,265 / 6,897 = $1,690

[# Question6]
Because Hallstead Jewelers was facing financial crisis, we recommend Hallstead
Jewelers to increase their average sales price. We can see from 2003 to 2004, the
average price decreased from $1,607 to $1,524 (by 5.16%), but we do not see that
there was any change to the number of sales tickets. Because Hallstead’s customers
are not sensitive to the price, so even we increase the price, the overall sales would
increase.
We still have a positive attitude toward other choices like giving more promotions or
cutting down the costs, but we can’t ensure those effects from Hallstead’s operating
statistics. We need more information to do the next step.