Hallstead Jewelers to Determine the Case Study

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Hallstead

Breakeven Analysis

2007

Sales

$10,711,000

Avg ticket

$1,553

Variable costs % of sales

87%

Average Variable Costs

$1,273.40

Contribution per ticket

$279.60

Fixed Costs

$1,796,000

Breakeven point ($)

$9,975,637

Breakeven point (tickets)

6,423.46

Actual # of tickets

Margin of Safety

4. By increasing advertising, Michaela would increase the firm's cost structure. This would raise the breakeven point. The calculation is as follows:

Hallstead

Breakeven Analysis

2007

Sales

$10,711,000

Avg ticket

$1,553

Variable costs % of sales

87%

Average Variable Costs

$1,351.11

Contribution per ticket

$201.89

Fixed Costs

$1,996,000

Breakeven point ($)

$15,353,846

Breakeven point (tickets)

9,886.57

Actual # of tickets

Margin of Safety

-2990

This shows that the new breakeven point for sales would be 9887 tickets, or $15,353,846. Thus, the increased advertising spending would need to increase ticket sales by 2990 over current levels, as that is the new margin of safety.

5. Sales in dollars would need to be $13,815,385 in order for Hallstead to break even in 2007, if all cost figures remained as they were in 2006. If it is assumed that the number of tickets is to remain the same, then the average ticket would need to increase. The fixed costs are $1,796,000. These should be divided by the number of tickets -- 6897 -- giving an average contribution of $260.40 needed to break even. If it assumed that all variable costs remain the same, then the average ticket price will need to increase by the same amount that the contribution margin needs to increase.

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In this case, that figure is:

$260.40 - $201.89 = $58.51

This would give the store an average ticket of $1,611. This average ticket level is roughly the same as the store had in 2003, a year in which Hallstead turned a profit and had a healthy margin of safety.

6. From this analysis, the most logical recommendation is that Hallstead should focus on increasing its average ticket, and on reducing its variable costs. The average ticket has slipped from $1,607 in 2003 to $1,553 in 2006, a drop that has knocked $54 from its contribution margin. The remaining reduction in contribution per ticket has come from rapidly escalating variable costs. It is assumed that the fixed costs are more difficult to change, largely because the increase in fixed costs was specifically related to the move to the newer, larger store.

Variable costs have escalated from 78.9% of sales in 2003 to 87% of sales in 2006. The company's cost of goods sold has not changed significantly -- in 2003 it was 50.4% and in 2006 it has actually increased to 52%. Salaries, however, increased from $2,021,000 to $3,215,000, an increase of 59%. Sales only increased 24.7% over the same time period. It is recommended, therefore, that Hallstead reduce salaries by 25%, in addition to restoring the previous product lines that had delivered the higher.....

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