HALLSTEAD JEWELLERS

Q1. How has the breakeven point in the 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?
(value in thousands of dollar)
Ans. Particulars 2003 2004 2006
Sales Value 8583 8102 10711
Less : Cost of Goods Sold 4326 4132 5570
Contribution Before Commission 4257 3970 5141
less : Commission @ 5% of sales 429 405 536
Contribution After Commission 3828 3565 4605
Less : Fixed Costs -
Salaries 2021 2081 3215
Advertisement 254 250 257
Administrative Exp 418 425 435
Rent 420 420 840
Depreciation 84 84 142
Misc. Exp. 53 93 122
Net Income 578 212 (406)

Number of Customer Orders is 5341 5316 6897

Therefore Contribution/Order is 0.7166916 0.6705982 0.6677468
Now Total Fixed Cost is 3250 3353 5011
Therefore Breakeven point in
number of Sales Tickets is 4535 5000 7504

And Break even point in Sales

Value is 7287.315 7620.412 11654.197

Margin of Safety 1295.685 481.588 (943.197)

The Various factors that caused these changes are :

1. Increase in Salary by more 50 % without similar increase in sales.
2. Increase in Rent to 200% because of increase in the shop size and shifting it to a costly location.
3. Higher Depreciation because of purchase of new furniture and creating better ambience in the
shop so as to make it more attractive.
4. And most of all because of the diproportionate increase in the sales of the shop, which
increase by only 32.2% over 2004. The loss in sales may have been due to the shift of loyal
customers to other suppliers during 2005, when Hallstead was closed for renovation, combined
with the strong competition that the company was now facing from the other market players,
both big and small. The sales per square foot have gone down.

Q2. One idea that the consultant had was to reduce prices to bring in more customers. If average
prices were reduced 10% and the number of sales tickets (unit sales) increased to 7500, would
the company's income be increased? With prices reduced, what would be the new breakeven
point in sales tickets and sales dollars?
Ans. If the idea is applied, then with cost figures of 2006, the Income statement will look as like:

Sales Value (reduced sales per order* 7500) 10483

Less : Cost of Goods Sold 6057
Contribution Before Commission 4426
less : Commission @ 5% of sales 524
Contribution After Commission 3902
Less : Fixed Costs 5011
Net Income (1109)

Now, Contribution per order is 0.5202099

Hence, BEP in Orders is 9632.6499
And BEP in Sales Value is 13463.503

Q3. Another idea that Gretchen had was to eliminate sales commission. Hallstead's was the only
jewellery store in the city that paid sales commission, and although both grandfather and father
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?

Ans. If the sales commission were not paid for all the three years, the income statement would
have been:
(value in thousands of dollar)
Particulars 2003 2004 2006
Sales Value 8583 8102 10711
Less : Cost of Goods Sold 4326 4132 5570
Contribution 4257 3970 5141
Less : Fixed Costs -
Salaries 2021 2081 3215
Advertisement 254 250 257
Administrative Exp 418 425 435
Rent 420 420 840
Depreciation 84 84 142
Misc. Exp. 53 93 122
Net Income 1007 617 130

Number of Customer Orders is 5341 5316 6897

Therefore Contribution/Order is 0.7970418 0.7468021 0.7453965
Now Total Fixed Cost is 3250 3353 5011
Therefore Breakeven point in
number of Sales Tickets is 4078 4490 6723
And Break even point in Sales
Value is 6553 6843 10440

Q4. Michaela felt that a bigger store could benefit from a greater advertising and suggested that
they increase advertising by $200000. How would this affect the breakeven point. Would you
recommend that the sisters try this?
Ans. If they increase their advertising, then for year 2006, their Income statement would look
as follows:
(value in thousands of dollar)
Ans. Particulars 2006
Sales Value 10711
Less : Cost of Goods Sold 5570
Contribution Before Commission 5141
less : Commission @ 5% of sales 536
Contribution After Commission 4605
Less : Fixed Costs -
Salaries 3215
Advertisement 457
Administrative Exp 435
Rent 840
Depreciation 142
Misc. Exp. 122
Net Income (606)

Number of Customer Orders is 6897

Therefore Contribution/Order is 0.6677468
Now Total Fixed Cost is 5211
Therefore Breakeven point in
number of Sales Tickets is 7804

And Break even point in Sales

Value is 12119.341

In this case we see that if we increase the advertising, the breakeven sales and breakeven order
of the company will rise even higher. Hence, if the proposed advertising increases the sales of
the company to the BEP level, then only it should be under taken.

Q5. 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?

Ans. In order to Breakeven, the total contribution of the company must be equal to its Fixed cost.
Now, the Fixed cost of the company in 2006 = $5011000
Now, Let the Selling price for 2007 = $X
Total Sales 6987X
less : Cost of Goods Sold, as per 2006 = 5570000
Less : Commission @ 5% of X = 6897X*.05

Therefore, 5011000+5570000= 0.95*6897*X

Hence, X = 1615

Q6. What do you recommend the managers of Hallstead jewellers to do?

Ans. Following moves might improve the profitability of Hallstead Jewellers :
1. Internet selling or e-selling, i.e. selling their products online.
2. Elimination of commission may be considered, since there is no such trend in the industry
and most of the customers that Hallstead has now are its loyal customers and hence commission
has no impact on them. In order to increase their new customer base, they may consider other
methods rather than giving commission. But in order to do so they must make sure their sales don't drop below 5.6%
3 Increase their capacity utilization. They need to have more sales per square feet.
4. Increasing Advertisement.
5. Planning some new incentive measures to attract its lost loyal customers.
6. Changing pricing mechanism in order to fend off new internet competitiors in case it is
not going to sell its product online.
7. Ultimately, whatever methods they use, they have to use it to increase their sales.
heir sales don't drop below 5.6%.