Hallstead Jewelers

Income Statement
2003 2004 2006
Sales 8,583,000.00 8,102,000.00 10,711,000.00
COGS 4,326,000.00 4,132,000.00 5,570,000.00
Gross margine 4,257,000.00 3,970,000.00 5,141,000.00

Expenses
Salaries 2,021,000.00 2,081,000.00 3,215,000.00
Commissions 429,000.00 405,000.00 536,000.00
Advertising 254,000.00 250,000.00 257,000.00
Administrative expense 418,000.00 425,000.00 435,000.00
Rent 420,000.00 420,000.00 840,000.00
Depreciation 84,000.00 84,000.00 142,000.00
Miscellaneous expense 53,000.00 93,000.00 122,000.00
Total expense 3,679,000.00 3,758,000.00 5,547,000.00

Net Income 578,000.00 212,000.00 (406,000.00)

 Operating Statistics
2003 2004 2006
Sales space (sq ft) 10,230.00 10,230.00 15,280.00
Sales per sq ft 839.00 792.00 701.00
Sales ticket 5,341.00 5,316.00 6,897.00 no of orders
Average sales ticket 1,607.00 1,524.00 1,553.00 price
Q How has the breakeven point in number of sales tickets (number of customer orders written) and breakeven in sale
to 2006? How has the margin of safety changed? What caused the changes?

Break-even Sales Calculations (thousands of dollars)

2003 2004 2006
Sales 8,583,000.00 8,102,000.00 10,711,000.00 32.20%
price 1,607.00 1,524.08 1,552.99
Less variable cost
COGS 4,326,000.00 4,132,000.00 5,570,000.00 34.80%
Commissions 429,000.00 405,000.00 536,000.00 32.35%
Total Variable cost 4,755,000.00 4,537,000.00 6,106,000.00
Unit 890.28 853.46 885.31

Contribution margin 3,828,000.00 3,565,000.00 4,605,000.00 29.17%

Contribution margin/unit 716.72 670.62 667.68
Less Fixed Cost
Salaries 2,021,000.00 2,081,000.00 3,215,000.00
Advertising 254,000.00 250,000.00 257,000.00
Administrative expense 418,000.00 425,000.00 435,000.00
Rent 420,000.00 420,000.00 840,000.00 100.00%
Depreciation 84,000.00 84,000.00 142,000.00 69.05%
Miscellaneous expense 53,000.00 93,000.00 122,000.00
Total Fixed cost 3,250,000.00 3,353,000.00 5,011,000.00 49.45%
Unit fixed cost 608.50 630.74 726.55

PNL 578,000.00 212,000.00 (406,000.00)

Fixed cost 3,250,000.00 3,353,000.00 5,011,000.00

Contribution margin/unit 716.72 670.62 667.68
Breakeven in sales (unit) 4,534.55 4,999.87 7,505.07 50.11%
Breakeven in rev 7,287,018.74 7,619,806.77 11,655,380.34

Budgeted Sales 8,583,000.00 8,102,000.00 10,711,000.00

BEP Sales 7,287,018.74 7,619,806.77 11,655,380.34
MOS (Budgeted sales-BEP sales) 1,295,981.26 482,193.23 (944,380.34)
%MOS (MOS/Budgetd sales) 15.10% 5.95% -8.82%
9.15% 14.77%

Inference: The increase in BEP in terms of units and in terms of revenue and decrease in %MOS is due to increased in fixed cos
renovation work of the shop, it resulted in negative growth in 2006.
n) and breakeven in sales dollars changed from 2003, to 2004, and

to increased in fixed cost. Since the rent and depreciation was continued even during the
Q2 One idea that the consultant had was to reduce prices to bring in more customers. If average prices were reduced t
would the company's income be increased? With prices reduced, what would be the new breakeven point in sales ti

Given 2003
Sales 8,583,000.00
price 1,607.00
Less variable cost
COGS 4,326,000.00
Commissions 429,000.00
Total Variable cost 4,755,000.00
Unit 890.28

Contribution margin 3,828,000.00

Contribution margin/unit 716.72
Less Fixed Cost
Salaries 2,021,000.00
Advertising 254,000.00
Administrative expense 418,000.00
Rent 420,000.00
Depreciation 84,000.00
Miscellaneous expense 53,000.00
Total Fixed cost 3,250,000.00
Unit fixed cost 608.50

PNL 578,000.00

Calculation of operating profit 7500

Particulars
Sales 10,482,709.87
(-)COGS 6,056,981.30
(-)comissions 582,862.11
CONTRIBUTION 3,842,866.46
(-)Fixed cost 5,011,000.00
Operating profit (1,168,133.54)

Sales Ticket 7500

Contribution per order 512.38
Break Even Units 9779.8089928974
Break Even Value 13,669,186.71
Margin of Safety (3,186,476.83)
Margin of Safety % -30.40%
erage prices were reduced ten percent (10%), and the number of sales tickets (unit sales) increased to 7,500,
w breakeven point in sales tickets and sales dollars?

2004 2006
8,102,000.00 10,711,000.00
1,524.08 1,552.99

4,132,000.00 5,570,000.00
405,000.00 536,000.00
4,537,000.00 6,106,000.00
853.46 885.31

3,565,000.00 4,605,000.00 Operating Statistics

670.62 667.68
Sales space (sq ft)
2,081,000.00 3,215,000.00 Sales per sq ft
250,000.00 257,000.00 Sales ticket
425,000.00 435,000.00 Average sales ticket
420,000.00 840,000.00
84,000.00 142,000.00
93,000.00 122,000.00
3,353,000.00 5,011,000.00
630.74 726.55

212,000.00 (406,000.00)

Per Per
unit 7663.30 Unit

1397.69 10,710,959.00 1397.69

807.60 6,188,865.20 807.60
77.71 595,553.28 77.71
512.38 3,926,540.53 512.38
668.13 5,011,000.00 653.90
-155.75 (1,084,459.47) -141.51

7663.30
512.38
9779.8089928974
13,669,186.71
(2,958,227.71)
-27.62%
Operating Statistics
2003 2004 2006
10,230.00 10,230.00 15,280.00
839.00 792.00 701.00
5,341.00 5,316.00 6,897.00 no of orders
1,607.00 1,524.00 1,553.00 price
Q3 Another idea that Gretchen had was to eliminate sales commissions. Hallstead's was the only jewelry store in the ci
and Father had insisted that commissions were one of the reasons for their success, Gretchen had her doubts? How
breakeven volume?

Given 2003
Sales 8,583,000.00
price 1,607.00
Less variable cost
COGS 4,326,000.00
Commissions 429,000.00
Total Variable cost 4,755,000.00
Unit 890.28

Contribution margin 3,828,000.00

Contribution margin/unit 716.72
Less Fixed Cost
Salaries 2,021,000.00
Advertising 254,000.00
Administrative expense 418,000.00
Rent 420,000.00
Depreciation 84,000.00
Miscellaneous expense 53,000.00
Total Fixed cost 3,250,000.00
Unit fixed cost 608.50

PNL 578,000.00

Solution
Sales commision = 0
So, Variable Cost = COGS

Years 2006
Sales 10,711,000.00
Variable cost (-) 5,570,000.00
Contribution 5,141,000.00
Fixed costs (-) 5,011,000.00

Net Income 130,000.00

Years 2006
No. of sale tickets 6,897.00

Break Even Sales ( units ) 6,722.60

(Fixed Cost/Contribution per unit)
 Average Sales ticket 1,553.00

Break Even point ( $ ) 10,440,191.88

(Units * Average sales ticket)

MOS 270,808.12
%MOS 2.53%

Reducing Sales commission is not a good idea :

1)VC per unit reduced from $885 to $807.60
2) Increase ($77) in CM per unit to $745.40 from $668
3) FC has not changed ($5011000) and CM per unit increased ($745), leading to BEP in units (6722.6) to decrease.
4) BEP in units decrease and avg. sales tickets ($1553) remain the same and leads to BEP in sales dollars ($1044019
s was the only jewelry store in the city that paid sales commissions, and although both Grandfather
cess, Gretchen had her doubts? How would the elimination of sales commissions affect the

2004 2006
8,102,000.00 10,711,000.00
1,524.08 1,552.99

4,132,000.00 5,570,000.00
405,000.00 536,000.00
4,537,000.00 6,106,000.00
853.46 885.31

3,565,000.00 4,605,000.00 Operating Statistics

670.62 667.68 2003
Sales space (sq ft) 10,230.00
2,081,000.00 3,215,000.00 Sales per sq ft 839.00
250,000.00 257,000.00 Sales ticket 5,341.00
425,000.00 435,000.00 Average sales ticket 1,607.00
420,000.00 840,000.00
84,000.00 142,000.00
93,000.00 122,000.00
3,353,000.00 5,011,000.00
630.74 726.55

212,000.00 (406,000.00)

807.60
745.40
 BEP in units (6722.6) to decrease.
ds to BEP in sales dollars ($10440191.88) to decrease.
ating Statistics
2004 2006
10,230.00 15,280.00
792.00 701.00
5,316.00 6,897.00 no of orders
1,524.00 1,553.00 price
Q4 Michaela felt that a bigger store could benefit from greater advertising and suggested that they increase advertisin
the breakeven point? Would you recommend that the sisters try this?

Given 2003
Sales 8,583,000.00
price 1,607.00
Less variable cost
COGS 4,326,000.00
Commissions 429,000.00
Total Variable cost 4,755,000.00
Unit 890.28

Contribution margin 3,828,000.00

Contribution margin/unit 716.72
Less Fixed Cost
Salaries 2,021,000.00
Advertising 254,000.00
Administrative expense 418,000.00
Rent 420,000.00
Depreciation 84,000.00
Miscellaneous expense 53,000.00
Total Fixed cost 3,250,000.00
Unit fixed cost 608.50

PNL 578,000.00

Solution
Increase in Advertisement Exenses 200,000.00

Salaries 3,215,000.00
Advertising 457,000.00
Administrative expense 435,000.00
Rent 840,000.00
Depreciation 142,000.00
Miscellaneous expense 122,000.00
Total Fixed cost 5,211,000.00

Years 2006
Sales 10,711,000.00
Variable cost (-) 6,106,000.00
Contribution 4,605,000.00
Fixed costs (-) 5,211,000.00
 Net Income (606,000.00)

Years 2006
No. of sale tickets 6,897.00

Break Even Sales ( units ) 7,804.62

(Fixed Cost/Contribution per unit)

Average Sales ticket 1,553.00

Break Even point ( $ ) 12,120,572.13

(Units * Average sales ticket)

MOS (1,409,572.13)
%MOS -13.16%

• Fixed Cost increased by 200,000.00

• Increase in the Break Even point (units) by 304 from 7500 to 7804 units
• BEP Sales increased by 465,191.79 from 11,655,380.34 to 12,120,572.13 dollars
• Increase in the advertising cost is leading to negative income and hence would not make this
gested that they increase advertising by $200,000. How would this affect

2004 2006
8,102,000.00 10,711,000.00
1,524.08 1,552.99

4,132,000.00 5,570,000.00
405,000.00 536,000.00
4,537,000.00 6,106,000.00
853.46 885.31

3,565,000.00 4,605,000.00 Operating Statistics

670.62 667.68 2003
Sales space (sq ft) 10,230.00
2,081,000.00 3,215,000.00 Sales per sq ft 839.00
250,000.00 257,000.00 Sales ticket 5,341.00
425,000.00 435,000.00 Average sales ticket 1,607.00
420,000.00 840,000.00
84,000.00 142,000.00
93,000.00 122,000.00
3,353,000.00 5,011,000.00
630.74 726.55

212,000.00 (406,000.00)

885.31
667.68
 11,655,380.34 465,191.79

to 7804 units
12,120,572.13 dollars
me and hence would not make this move.
ating Statistics
2004 2006
10,230.00 15,280.00
792.00 701.00
5,316.00 6,897.00 no of orders
1,524.00 1,553.00 price
Q5 How much would the average sales ticket have to increase to breakeven if the fixed cost remained the same in 200

Given 2003
Sales 8,583,000.00
price 1,607.00
Less variable cost
COGS 4,326,000.00
Commissions 429,000.00
Total Variable cost 4,755,000.00
Unit 890.28

Contribution margin 3,828,000.00

Contribution margin/unit 716.72
Less Fixed Cost
Salaries 2,021,000.00
Advertising 254,000.00
Administrative expense 418,000.00
Rent 420,000.00
Depreciation 84,000.00
Miscellaneous expense 53,000.00
Total Fixed cost 3,250,000.00
Unit fixed cost 608.50

PNL 578,000.00

Solution
Fixed cost of the company in 2006 =
Let the Selling price per unit be =
Total no of orders =
Total sales =

Particulars
Sales
(-)COGS
(-)Comission
CONTRIBUTION

At breakeven point the total fixed cost is equal to contribution.

So,

So the average sales ticket have to increase by 1615 to break even if the fixed cost
fixed cost remained the same in 2007 as it was in 2006?

2004 2006
8,102,000.00 10,711,000.00
1,524.08 1,552.99

4,132,000.00 5,570,000.00
405,000.00 536,000.00
4,537,000.00 6,106,000.00
853.46 885.31

3,565,000.00 4,605,000.00 Operating Statistics

670.62 667.68 2003
Sales space (sq ft) 10,230.00
2,081,000.00 3,215,000.00 Sales per sq ft 839.00
250,000.00 257,000.00 Sales ticket 5,341.00
425,000.00 435,000.00 Average sales ticket 1,607.00
420,000.00 840,000.00
84,000.00 142,000.00
93,000.00 122,000.00
3,353,000.00 5,011,000.00
630.74 726.55

212,000.00 (406,000.00)

5,011,000.00
x
6,897.00
6897*x

2007
6897*x
5,570,000.00
6897x * 0.05
6552.15x-5570

to contribution.
6552.15x-5570=5011
x=1615
1615 to break even if the fixed cost remain the same in 2007 as it was in 2006
ating Statistics
2004 2006
10,230.00 15,280.00
792.00 701.00
5,316.00 6,897.00 no of orders
1,524.00 1,553.00 price
Q6 What would you recommend that the managers at hallstead Jewelers do?

Following moves might improve the profitability for Hallstead jwellers:

1. Sell their products online
2.Loyalty program
3. Elimination of comission can also be considered as it is not a common practice in the market
4. Introduce discount coupons on frequent purchase by a customer