Location via proxy:   [ UP ]  
[Report a bug]   [Manage cookies]                
Scribd Logo
Upload

Welcome to Scribd!

  • 1K views

    E0311 Hallstead Jewelers

    Uploaded by

    altemurcan kursunlu
    The document discusses changes in breakeven point and margin of safety for a jewelry store from 2003-2006. [1] Variable costs and fixed costs increased more than average sales prices and unit sales, causing the breakeven point and margin of safety to worsen over time. [2] Reducing prices 10% would further decrease income and increase the breakeven point. [3] Eliminating sales commissions could lower the breakeven point but may also lower unit sales. [4] Increasing advertising costs by $200k would raise the breakeven point, so this is not recommended. [5] Average prices would need to increase 4% to breakeven with fixed costs remaining the same as 2006

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    E0311 Hallstead Jewelers

    Uploaded by

    altemurcan kursunlu
    1K views2 pages
    The document discusses changes in breakeven point and margin of safety for a jewelry store from 2003-2006. [1] Variable costs and fixed costs increased more than average sales prices and unit sales, causing the breakeven point and margin of safety to worsen over time. [2] Reducing prices 10% would further decrease income and increase the breakeven point. [3] Eliminating sales commissions could lower the breakeven point but may also lower unit sales. [4] Increasing advertising costs by $200k would raise the breakeven point, so this is not recommended. [5] Average prices would need to increase 4% to breakeven with fixed costs remaining the same as 2006

    Original Description:

    case solution

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Read this document in other languages

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses changes in breakeven point and margin of safety for a jewelry store from 2003-2006. [1] Variable costs and fixed costs increased more than average sales prices and unit sales, causing the breakeven point and margin of safety to worsen over time. [2] Reducing prices 10% would further decrease income and increase the breakeven point. [3] Eliminating sales commissions could lower the breakeven point but may also lower unit sales. [4] Increasing advertising costs by $200k would raise the breakeven point, so this is not recommended. [5] Average prices would need to increase 4% to breakeven with fixed costs remaining the same as 2006

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1K views2 pages

    E0311 Hallstead Jewelers

    Uploaded by

    altemurcan kursunlu
    The document discusses changes in breakeven point and margin of safety for a jewelry store from 2003-2006. [1] Variable costs and fixed costs increased more than average sales prices and unit sales, causing the breakeven point and margin of safety to worsen over time. [2] Reducing prices 10% would further decrease income and increase the breakeven point. [3] Eliminating sales commissions could lower the breakeven point but may also lower unit sales. [4] Increasing advertising costs by $200k would raise the breakeven point, so this is not recommended. [5] Average prices would need to increase 4% to breakeven with fixed costs remaining the same as 2006

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    1.

    How has the breakeven point in number of sales tickets (number of customer orders written) and
    breakeven in sales dollars changed from 2003, to 2004, and to 2006? How has the margin of safety
    changed? What caused the changes?

    Assume COGS and Commissions are variable and rest of the cot items fixed. This gives:

    2003 2004 2006


    Variable cost $k 4755 4537 6106
    Fixed cost $k 3250 3353 5011
    Sales rev $k 8583 8102 10711
    Sales tickets unit 5341 5316 6897
    Avg sales ticket $ 1607 1524 1553
    Unit VC $ (VC/Sales 890 853 885
    tickets)
    Breakeven sales unit 4,533 4,997 7,502
    =FC/(Price-unit VC)
    Breakeven sales $k 7,284,531 7,615,428 1,1650,606
    Breakeven unit*avg sales
    ticket
    MOS unit 808 319 -605
    Items sold-breakeven
    unit
    MOS rev $k 1,298,456 486,156 -939,565
    MOS unit* avg ticket

    Variable cost increase is 34% and fixed cost increase is 49% whereas avg sales ticket increased only 2% and sales
    units increased by 30%. Disparity between cost increases and sales unit and price increase caused the changes

    2. One idea that the consultant had was to reduce prices to bring in more customers. If average prices
    were reduced ten percent (10%), and the number of sales tickets (unit sales) increased to 7,500, would
    the company's income be increased? With prices reduced, what would be the new breakeven point in
    sales tickets and sales dollars?

    Avg price→$1398

    Sales unit→7500, new revenue→10,485,000.

    Total variable cost=7500*885=6,637,500, total fixed cost=5,011,000, total cost→11,648,500

    Net income=-1,163,500. We are losing more money compared to the initial scenario. Price decrease usually brings
    not enough sales lift to cover revenue dilution

    Breakeven sales unit=5,011,000/(1,398-885)= 9,768 units for breaking even, this is much more than 7,500

    Breakeven sales revenue=1398*9768=$13,655.664 for breaking even

    3. Another idea that Gretchen had was to eliminate sales commissions. Hallstead's was the only jewelry
    store in the city that paid sales commissions, and although both Grandfather and Father had insisted
    that commissions were one of the reasons for their success, Gretchen had her doubts? How would the
    elimination of sales commissions affect the breakeven volume?
    New Variable cost=COGS=5570, sales tickets=6897, unit VC=$808

    Breakeven sales unit=5,011,000/(1553-808)= 6,726 units for breaking even. This is lower than our sales ticket units,
    meaning that the company makes profit. However, keep in the mind that without any commission it would be
    nearly impossible to keep the sales units as before (6897). Lowering sales ticket units makes unit VC larger, and
    potentially drives the breaking even units higher. Given the information we can’t clearly comment on the overall
    effect of eliminating the commission

    4. Michaela felt that a bigger store could benefit from greater advertising and suggested that they
    increase advertising by $200,000. How would this affect the breakeven point? Would you recommend
    that the sisters try this?

    New Fixed cost=5,211,000

    Breakeven sales unit=5,211,000/(1553-885)= 7,801 units for breaking even. As advertising is affecting fixed costs,
    assuming the sales price is not affected by the promotion, break even quantity is increasing. Therefore, unless
    advertising will increase average prices, I don’t recommend them to increase their advertising spending

    5. How much would the average sales ticket have to increase to breakeven if the fixed cost remained the
    same in 2007 as it was in 2006?

    5011/(P-885)=6897, Solve for P=$1,612, indicating a 4%price increase from the last year

    6. What do you recommend that the managers at Hallstead Jewelers do?

    I recommend combination of

    • increasing prices for low selling/low margin products


    • optimizing sales commission system (more aggressive for higher prices, and no commission for below
    target prices)
    • reducing fixed costs

    You might also like