Hallstead Jewelers was one of the largest jewelry and gift stores in the United States for 83 years. Customers came from throughout the region to buy from extensive collections in each department. Any gift from Hallstead’s had an extra cache attached to it as they were known for having the best.
Even though the principal retail shopping areas shifted two blocks west, Hallstead’s reputation and selection still brought in customers. In 1999 however, sales became stagnate and profits were starting to slip. The owners (two sisters, Gretchen and Michaela) made several changes in an effort to revitalize the store back to its full glory. The largest decision they made was to move the ...view middle of the document...
2.0 Changes in Breakeven and Margin of Safety
The following table shows that while the breakeven in both sales dollars and number of sales tickets has continued to rise from 2003, to 2004, and to 2006, the margin of safety has decreased over the same period of time. What caused this change?
3.0 Reduction in Price
One idea the consultant had was to reduce prices to bring in more customers. The following table illustrates that by reducing prices 10% and increasing sales to 7,500 tickets, the company’s operating income significantly decreases, losing an additional $580K over the previous year’s income/loss. Breakeven in sales tickets is 9,337 – an increase of 1,832 from the previous year. Breakeven in sales dollars increases $1.47 million to a total of $13.12 million needed.
4.0 Elimination of Sales Commissions
Another idea that Gretchen had was to eliminate sales commissions even though both her Grandfather and Father insisted that commissions were one of the reasons for their success in the past. The figure below illustrates that the elimination of sales commission greatly affects operating income. By eliminating the sales commission in a projection of the three previously reported years, we can see that operating income is in the positive for all three periods. Although Gretchen’s father and grandfather perceived commission to give them a competitive edge, calculations prove that the commission payments are definitely hurting Halstead’s bottom line. Further consideration should be given to eliminate them if possible.
Michaela felt that a bigger store could benefit from greater advertising and suggested that advertising be increased by $200,000. If advertising expenses were increased by $200,000, the breakeven point in both sales dollars and sales tickets would increase. For Fiscal Year (FY) 2006, Hallstead spent $257,000 on advertising. If this were increased to $457,000, the breakeven point would be as follows:
Breakeven in sales tickets = Breakeven sales dollars / Average sales tickets
7,805 = $12,120,525.73 / $1,553
Breakeven in sales dollars = Total Fixed Costs / Contribution margin ratio
$12,120,525.73 = $5,211,000 / 0.430
The affect of the increases in advertising expenditures on the breakeven point in sales dollars would be an increase from $11,655,335.72 to $12,120,525.73, a difference of $465,190.01.
It would probably be a good idea for Hallstead Jewelers to try the increase in advertising. Although the company is currently struggling with a negative operating income, the increase in breakeven dollars is relatively nominal. Competition from much larger companies, such as Tiffany & Company, as well as internet jewelry sales from companies such as Blue Nile has taken some of their business. Perhaps some of this increased advertising budget should be spent on expanding their business to the internet and advertising there; allowing Hallstead to compete more directly with Blue...