Hallstead Jewelers Case Study
October 6, 2011
1) Fixed Costs=Salaries+Advertising+Administrative Expenses+Rent+Depreciation+Miscellaneous expenses
Breakeven=Fixed Costs/Contribution Margin
Breakeven$=Breakeven Units*Unit Price
Margin of Safety=Sales-Breakeven Sales
The breakeven point increases from year to year because of the increases in fixed costs. Because these costs are increasing, the company needs to produce and sell more units in order to cover them. The margin of safety decreases from year to year for the same reason. ...view middle of the document...
3) The elimination of commissions would affect the breakeven volume. The commissions are classified as a variable cost and therefore affect the contribution margin. Eliminating them would increase the contribution margin, which would in turn decrease the breakeven volume.
New Breakeven Point: 4,921,000/((10,711,000-5,570,000)/13,063)=12,504.13 This reduces the breakeven point by about 1500 tickets.
4) Increasing advertising would be an increase in fixed costs. The breakeven point is calculated using fixed costs so increasing these would increase the breakeven point.
New Breakeven Point: 5,121,000/352.52=14,526.84. Breakeven$=14,526.84*819=11,897,481.96
The breakeven point increased by about 500 tickets and the breakeven sales increase by about $465,000. If the sisters believe that they can earn that much money from advertising then they should try doing this.
5) To breakeven in 2007 assuming all other costs were the same the company would have to increase the ticket prices by $25.14
Sales-VC-FC=Profit. 13,063x-467.43x-4,921,000 X=$844.14
6) Cutting commissions appears to be the best option, although it is unclear how their staff will react to this decision. Commissions provide incentive for sales so cutting them may actually lead to a decrease in sales. Increasing their advertising seems risky because it is hard to know exactly how much they will be able to gain in sales. It also may be difficult to come up with the capital to fund the advertising. Decreasing prices will lead to a decrease in profits so they should not try this in order to improve their position. The best solution for the long run would be for Hallstead Jewelers to consider moving back to a smaller space. Their sales do not provide enough income to constitute their new facility.