Running head: HALLSTEAD JEWELERS 1
Hallstead Jewelers
Group One
Members
Florida Institute of Technology
Managerial Accounting
BUS5431 Term Fall 1 2016
Professor Art Gilbert
9 October 2016
HALLSTEAD JEWELERS 2
Hallstead Jewelers
Hallstead Jewelers is faced with several factors that has affected the company’s
profits. Change can impact the financial stability of a company as well can impact the
culture of a well-established organization. Homestead Jewelers was located at Lake
Avenue in a popular location in one of the largest cities in the Tri-State area. After 85
years in one location Hallstead Jewelers had an outstanding reputation for fine quality
products. The company maintained the same routine and tradition that had not change
since its beginning.
It was not until the unfortunate deaths of the company founder (Grandfather), and
a few years later their Father, did things start going wrong for Hallstead Jewelers. The
business was inherited by daughters Gretchen and Michaela who are now tasked with the
decision making and problem solving for the company. Due to a combination of issues
including declining sales since 1999; the signing of a 5-year lease; a move to a new,
larger location; costs associated with the renovations of new retail store; and loss of
return customers, the business has shown negative financial figures.
An analysis of the company’s financial documents has determined that many of
the issues stem from the move to the new location, the associated costs and an a
disproportionate increase in sales volume. Hallstead Jewelers reflects a break-even point
that equals the fixed cost divided by the company’s contribution margin per unit.
2003 2004 2005
Gross Margin $4,257 $3,970 $5,141
Total expenses 3,679 3,758 5,547
Net income 578 212 (406)
Hallstead Jewelers
HALLSTEAD JEWELERS 3
Break – Even Point in Number of Sales Tickets
2003 2004 2005
Break-even in units (fixed costs / CM per unit) 4,535 5,000 7,505
Break-even sales (fixed costs / CM ratio) $7,287.03 $7,620.20 $11,655.34
Margin of safety (expected sales less break-even $1,295.97 $481.80 ($944.34)
sales)
Break-even point in number of sales tickets calculations are as follows:
The break even in units Break-even sales
Break-even in units (fixed costs / Break-even sales (fixed costs /
CM per unit) CM ratio)
2003: (3,250 / 797.04) = 4,078 2003: (3,250 / 0.4959) =
2004: (3,353 / 746.80) = 4,490 $6,552.68
2006: (5,011 / 745.40) = 6,723 2004: (3,353 / 0.4900) =
$6,842.82
2006: (5,011 / 0.4799)
=$10,440.15
Margin of Safety
Margin of safety (expected sales less break-even sales)
2003: ($8,583 - 6,552.68) = 2,030.32
2004: ($8,102 - 6,842.82) = 1,259.18
2006: ($10,711- 10,440.18) = 270.82
Hallstead Jewelers
Category Costs Type
Salaries Fixed
Commission Variable
Advertising Fixed
Administrative expenses Fixed
Rent Fixed
Depreciation Fixed
Miscellaneous expenses Fixed
Hallstead Jewelers
Income Statements
Year Ending in, January 31, 2006
2003 2004 2006
Sales $8,583 $8,102 $10,711
Cost of goods sold 4,326 4,132 5,570
HALLSTEAD JEWELERS 4
Gross margin $4,257 $3,970 $5,141
Expenses
Selling expense
Salaries 2,021 2,081 3,215
Commission 429 405 536
Advertising 254 250 257
Administrative expense 418 425 435
Rent 420 420 840
Depreciation 84 84 142
Miscellaneous expense 53 93 122
Total expense $3,679 $3,758 $5,547
Net income $ 578 $ 212 $ (406)
Hallstead Jewelers
Operating Statistics
2003 2004 2006
Sales space (square 10,230 10,230 15,280
feet)
Sales per square foot $ 839 $ 792 $ 701
Sales ticket 5,341 5,316 6,897
Average sales ticket $1,607 $1,524 $1,553
Based on the analysis, we see that the sales figures required for Hallstead to break even
dramatically increased from 2004 to 2006, primarily due to the substantial increase in salaries
and rent. In 2004, the projected required break-even revenue, based on a total sales ticket
volume of 5,316 tickets, would be $6,842,820. In 2006, the total sales ticket volume increased to
6,897 total tickets, but due to the increase in total fixed costs, the required amount of revenue to
break even rose to $10,440,150, a net change of $3,887,470.
With the dramatic shift in required break-even revenue required between 2004 and 2006,
the Hallstead team so an equally dramatic shift in the overall margin of safety. In 2004, the
margin of safety was 1,259,180 as compared to $270,820 in 2006. As previously stated this
decrease can be directly related to the increase in salaries required to manage the new store and
HALLSTEAD JEWELERS 5
the overall increase in rent and associated fixed administrative fees associated with the new
facilities.
Potential Solutions
As part of the consulting project sponsored by Gretchen Reeves and Michaela Hurd, the
consultant was tasked with coming up with potential solutions that could help stem the losses
that the Hallstead sisters were seeing in the new store location. One of the potential solutions
was to decrease average ticket sales by 10% with the expectation that the total ticket volume
would increase from the 6,897 tickets seen in 2006 to a new total of 7,500 cumulative sales
tickets. Using increment cost analysis we see the following impacts of the proposed solution:
2006 (7500/10%)
Sales $10,483
Cost of goods sold 6,057
Gross Margin $4,426
COGS per unit 807.60
Expenses
Selling expenses
Salaries 3,215
Commissions 525
Advertising 257
Administrative expenses 435
Rent 840
Depreciation 142
Miscellaneous expenses 122
5,536
Net income $ (1,110)
Total fixed costs 5,011
2006 (7500/10%)
Sales Space 15,280
Sales per square foot $701
Sales tickets 7500
Average sales ticket $1,398
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CM per unit $590.10
CM ratio 0.422193176
Hallstead Jewelers
Break – Even Point in Number of Sales Tickets
2006 (7500/10%)
Break-even in units (fixed costs / CM per unit) 8,492
Break-even sales (fixed costs / CM ratio) $11,868.97
Margin of safety (expected sales less break-even
sales) ($1,386.26)
As illustrated in the calculations, the projected gross sales receipts would actually
decrease from the 2006 high of $10,711,000 to $10,483,000 even with an in increase in sales
tickets of 603 tickets. In addition to the decrease in overall revenue, the overall variable costs
would increase from $6,106,000 to $6,582,000 or a net increase of $476,000. The combination
of an overall decrease in net sales and a net increase in variable costs, makes the proposal of a
10% decrease in average selling price for an increase in overall ticket volume a losing
proposition for Hallstead.
Eliminate Sales Commission
Hallstead’s had a company history of paying commissions to its employees. And while
this may have helped get the business started and contributed to their success, Gretchen knew
that something needed to change to make Hallstead’s profitable again. Based on the figures
below, she knew that the sales commissions needed to be eliminated to help keep her breakeven
volume at a level that would lead to more profits for the store. If Gretchen had eliminated the
sales commissions in 2006, the breakeven volume would have decreased by 782 sales tickets
which would have decreased the breakeven price of sales by $1,214,446. By eliminating the
sales commissions in 2006, Gretchen would have seen a profit instead of a loss.
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Hallstead Jewelers
Incremental Analysis
2006 2006 Incremental Revenue
Income Statement No Commission and Costs
Sales $10,711,000 $10,711,000 $0
Cost of goods sold 5,570,000 5,570,000 0
Contribution margin $5,141,000 $5,141,000 $0
Expenses
Selling expense
Salaries $3,215,000 $3,215,000 $0
Commissions 536,000 0 -536,000
Advertising 257,000 257,000 0
Administrative expense 435,000 435,000 0
Rent 840,000 840,000 0
Depreciation 142,000 142,000 0
Miscellaneous expenses 122,000 122,000 0
Total expenses $5,547,000 $5,011,000 -$536,000
Net income -$406,000 $130,000 $536,000
Breakeven Point (customer orders
written)
2006 2006
No Commission
Sales Tickets 6,897 6,723
Average sales tickets $1,553 $1,553
Variable cost per ticket $808 $808
CM per unit $745.40
CM ratio 0.47997424
Breakeven Point (sales dollars)
2006
Original No Commission
Sales tickets 6,897 6,723
Sales dollars $10,711,041 $10,440,144
HALLSTEAD JEWELERS 8
Breakeven volume would go down by 782 sales tickets and sales to breakeven would decrease
by $1,214,446 (7,505 – 6723 tickets x $1,553).
Advertising Increase
Michaela Hurd and Gretchen Reeves are experiencing a decline in sales. Michaela feels
that a bigger store could benefit from greater advertising. She suggested to her sister Gretchen
that they should increase advertising by $200,000. Currently, their business requires
$11,653,488 dollars in sales to break even. If the advertisement cost is increased to Michaela’s
recommended amount the business would require $12,118,604 dollars in sales to break
even. That is a difference of $465,116 dollars in sales required to cover the additional costs. If
Michaela can guarantee an approximate increase in sales of four percent, then it would be
advisable that the sisters increase their advertisement.
Average Break-even Ticket Price Increase
The last possible approach that the sisters can take is to potentially increase the overall
average ticket price in order to bring the new, larger location to a break-even posture. Based on
the current cost profiles, the Michaela and Gretchen know that they can keep their overall fixed
costs the same in 2007 as they did in 2006. They also project that they can sell the same number
of tickets in 2007. With these assumptions in hand, the sister team projects the following for
potential break-even ticket increases:
Contribution Margin Ratio = SP - VC
SP
HALLSTEAD JEWELERS 9
Varible cost (COGS +
$6,106,000
$10,711,000 Selling Price Commission)
$10,711,000
Contribution Margin Ratio = 0.43
Dollars needed
to break even = TFC - Profit
Contribution Margin Ratio
TFC (Fixed Selling
Dollars needed $5,011,000 Expenses)
to break even = 0.43 CM
Dollars in sales
needed to break
even = $11,653,488.37
Based on this projected dollar figure, we know that Hallstead needs approximately $1,170,778
in additional revenue to break even in 2007 based on steady fixed costs. With the assumption
of 6,897 tickets staying steady in 2007, the average ticket price would need to increase by
approximately $170 per ticket in order to make the store break even ($1,172,469/6,897 =
$169.75).
Breakeven point if advertisement cost is increased by $200,000
Taking the analysis one step further, the team analyzed what the required ticket sales
would need to be with the addition of $200,000 of additional advertising added into the total
fixed costs. Based on the calculations below, the overall breakeven sales figure would adjust
up to $12,118,604.65. Assuming all the costs remain the same and the total ticket count
HALLSTEAD JEWELERS 10
remains at 6,897, the overall sales delta would come to $1,635,894.78 which would result in a
total sales ticket increase of approximately $237 per ticket ($1,635,894.78 / 6,897 = $237.19).
TFC (Fixed Selling
Dollars needed $5,211,000 Expenses)
to break even = 0.43 CM
Dollars in sales
needed to break
even = $12,118,604.65
Difference in breakeven point $465,116.28
Conclusion
Recognizing that the jewelry business was changing and in an effort to save the family
business, Gretchen and Michaela hired a consultant to assess the current state of the business and
make recommendations to improve company profits. One such recommendation was to move to
a larger store, which Hallstead Jewelers did in 2006. It was not long before the financial
statement showed that the move to a larger location was not enough and that something else had
to be done. The second recommendation from the consultant was to increase sales by reducing
prices. This idea is not supported by group one as it would reduce overall revenue and increase
variable cost in excess of $476,000.
The two ideas that the consultants recommended showed a negative impact on Hallstead
Jewelers profits. The idea that Michaela had to increase sales by increasing the advertising
HALLSTEAD JEWELERS 11
budget by $200,000 was also an idea that would not fare well for the jewelers. In this case the
company would have to increase its sales by $465,116 dollars to support this endeavor.
The idea that group one supports and recommends is for Hallstead Jewelers to follow a
similar business model as its competitors in the city. This model calls for the elimination of sales
commissions. Our analysis shows that when applied to year 2006 financial data, Hallstead
Jewelers would have had a positive net income of $130,000, versus a loss of $406,000. The
overall incremental net income or profit for the elimination of sales commissions is $536,000
and is the correct decision for Hallstead Jewelers to implement.
HALLSTEAD JEWELERS 12
References
Bruns, W. J. (2007, March 8). Hallstead Jewelers. Harvard Business School, 1-4.
