Hallstead Jewelers Case Study
#team 1: 20190962802이가현, 2018018140이수연, 2017003063이재용, 2018030719윤하린
A1. In this case, the variable cost is COGS only. The breakeven point in number of sales tickets for 2003, 2004 and
2006 are 4,616, 5,033, and 7,442. And the breakeven in sales dollars(thousands of dollars) for 2003, 2004 and
2006 are $7,417, $7,670, $11,557. The margin of safetey in dollars(percentage) for 2003, 2004 and 2006 are
$1,165,357(13.6%), $432,241(5.3%), -$845,831(-7.9%). In 2006, the margin of safety(%) is negative because the actual
sales tickets(6,897) are less than the breakeven sales tickets(7,442).
A2. The company’s income decrease. With a 10% decrease in sales price, Average Sales Ticket ($1398) – Variable
Cost per ticket ($808) = Contribution Margin per ticket ($590). Total CM is $4,425,769(= $590 x 7500tickets). The fixed
cost is same as $5,547,000, so the net operating income is -$1,121,231(= CM $4,425,769 – FC $5,547,000). The loss
of NOI is greater than existing 2006’s NOI -$406,000. New breakeven point in sales tickets is 9400tickets (FC
$5,547,000 / CM per ticket 590) and new breakeven point in sales dollars is $13,138,467(FC $5,547,000 / CM ratio
42% (CM $4,425,769 / Sales $10,482,750)).
A3. The elimination of sales commissions would increase net income due to a reduction in the variable costs. In 2006,
removing sales commissions would increase income (from -$406,000 to $130,000). Plus, breakeven volume
would go down by 174 sales tickets (from 6,897 to 6,723), and sales to breakeven would decrease by $270,932
(from $10,711,041 to $10,440,109). In 2006, sales increased to $10,711,000. However, despite the increasing sales,
the firm lost money. This shows that with a rise in fixed costs due to the new location, sales commissions can be
considered as an unnecessary expense.
A4. Since the advertising cost is a fixed cost, the total fixed cost will increase by $200,000, thus resulting in an
increase of the breakeven point. In statistics, the overall net income will decrease due to the increase of fixed
cost, and thus I would not recommend this strategy to the sisters.
A5. Assuming that the fixed cost remained the same, the units of sales tickets would be 6,897, variable cost would be
COGS only, resulting in $5,570,000, and the fixed cost would be $5,547,000. Therefore, the total cost would be
$11,117,000.
In order to break even, the equation would be (sales tickets) * (new price) = (Total cost). Therefore, the new price
would be $11,117,000 / 6,897 = $1,611.86
A6. We suggest three big strategies to get more profit based on the answers above and formula “net income = (sales
price - VC)Q - FC”.
1. Increase quantity. Increase sales beyond 7,500 units to cover the fixed cost.
- Should not decrease 10% of sales price. Though it increases the number of sales units, and looks like good for net
operating income, it makes decline in net operating income and more needs for take break-even point of sales and units.
2. Cut down the fixed cost.
- Hallstead Jewelers already cannot cover the fixed cost with present’s amount of sales. Therefore, it should not open
new branches anymore. (selection & concentration strategy is needed)
- Instead, recommend online service or website which will demand less fixed cost than opening a new local store with
meeting more customers.
- To reduce fixed cost, sales commission also should be eliminated.
- Expanding advertising is also not recommended in the same context of increasing fixed cost.
3. Increase the price of sales ticket.
- However, this can be dangerous if Hallstead Jewelers cannot find any differentiation between other new and strong
competitors. (They can absorb its customers.)