Hallstead Jewelers Case Study

Submitted by Yellow Team Eunice King Ronda Klassen Joshua Krupnick Larry McCraw Ronald Mills wad 5431 Managerial Accounting Professor Nancy Shoemake April 18, 2010 1. 0Summary Hallstead Jewelers was one of the largest jewelry and gift stores in the United States for 83 social classs. Customers came from throughout the region to buy from grand collections in each department. Any gift from Hallsteads had an extra cache link to it as they were known for having the best.Even though the principal retail shop aras shifted two blocks west, Hallsteads reputation and selection still brought in customers. In 1999 however, gross r counterbalanceue became stagnate and profits were starting to slip. The owners (two sisters, Gretchen and Michaela) do several changes in an effort to revitalize the store back to its full glory. The largest decision they made was to conduce-up the ghost the stores location, expanding it by 50% more space and selling staff. This move resulted in a five- cours e of instruction lease as substantially as extensive and expensive renovations.They also made some changes in product offerings and offered more gross gross revenue potential at the cost of minor reductions in margins. During the year it took to complete the Hallsteads renovation the industry started showing major changes toward net profit based jewelry gross revenue. Tiffany & Company, a line of reasoning organization with an origin much bid Hallstead Jewelers, grew into an international powerhouse. At the same time, a start-up earnings seller, dreary Nile, became the secondment largest diamond seller in the U. S.While Hallsteads was growing their better costs by doubling their rent payments, Tiffany and Blue Nile were increase their revenue with virtual storefronts allowing them to append gross gross gross revenue with very little increase in expense. In an effort to explore ideas in strategy that would return the business to profitability, the sisters compiled some questions for their accountant to analyze using some additional run statistics. The pursual answers will take a deeper look into the mechanics of the business and provide Gretchen and Michaela with commendations to get their business back on track. 2. Changes in Breakeven and boundary line of Safety The following table shows that while the breakeven in some(prenominal) sales sawbucks and number of sales slatings has continued to rise from 2003, to 2004, and to 2006, the margin of safety has reduced over the same period of time. What caused this change? 3. 0Reduction in Price cardinal idea the adviser had was to reduce prices to bring in more customers. The following table illustrates that by reducing prices 10% and increasing sales to 7,500 tag ends, the callers run income importantly decreases, losing an additional $580K over the previous years income/loss.Breakeven in sales tickets is 9,337 an increase of 1,832 from the previous year. Breakeven in sales dollars incre ases $1. 47 million to a total of $13. 12 million required. 4. 0Elimination of sales Commissions Another idea that Gretchen had was to eliminate sales commissions even though both her Grandfather and Father insisted that commissions were one of the reasons for their success in the past. The figure downstairs illustrates that the elimination of sales commission greatly instills operating income.By eliminating the sales commission in a projection of the trio previously report years, we can see that operating income is in the positive for all three periods. Although Gretchens father and grandfather perceived commission to give them a competitive edge, calculations prove that the commission payments be definitely hurting Halsteads bottom line. Further consideration should be given to eliminate them if possible. 5. 0Advertising Michaela mat that a bigger store could benefit from greater announce and suggested that announce be increased by $200,000.If advertising expenses were i ncreased by $200,000, the breakeven forecast in both sales dollars and sales tickets would increase. For Fiscal Year (FY) 2006, Hallstead washed-out $257,000 on advertising. If this were increased to $457,000, the breakeven point would be as follows Breakeven in sales tickets = Breakeven sales dollars / Average sales tickets 7,805 = $12,120,525. 73 / $1,553 Breakeven in sales dollars = entireness Fixed Costs / Contribution margin ratio $12,120,525. 73 = $5,211,000 / 0. 430The affect of the increases in advertising expenditures on the breakeven point in sales dollars would be an increase from $11,655,335. 72 to $12,120,525. 73, a difference of $465,190. 01. It would probably be a good idea for Hallstead Jewelers to try the increase in advertising. Although the company is shortly struggling with a negative operating income, the increase in breakeven dollars is relatively nominal. Competition from much larger companies, such as Tiffany & Company, as well as internet jewelry sales f rom companies such as Blue Nile has taken some of their business.Perhaps some of this increased advertising reckon should be spent on expanding their business to the internet and advertising thither allowing Hallstead to compete more directly with Blue Nile and boost sales. Increased advertising may also help bring in more customers who are not yet aware of the companys new uppercase St. location and larger renovated store. 6. 0Average Sales Tickets The following overview takes a look at how much the average sales ticket would have to increase to breakeven if the rigid cost remained the same in 2007 as it was in 2006. Average sales ticket for 2006 is $1,553 6,897 tickets for an Operating loss of $406,000. of tickets x Average sales ticket = Sales revenue 6,897 tickets x $1,553 = $10,711,041 Average ticket sale dollar count compulsory to break even = Sales revenue needed to break even / of sales tickets for 2006 Average ticket sale dollar amount needed to break even = (Fixed Cost / Contribution shore Ratio) / of sales tickets for 2006 Average ticket sale dollar amount needed to break even = ($5,011,000 / 0. 43) / 6,897 Average ticket sale dollar amount needed to break even = $1689. 2 Average sales ticket increase to break-even = Average ticket sale needed to break even Average sales ticket for 2006 Average sales ticket increase to break-even = $1690 $1,553 = $137 By reducing prices 10% and increasing sales to 7,500 tickets, the companys operating income significantly decreases, losing an additional $580K over the previous years income/loss. Breakeven in sales tickets is 9,337 an increase of 1,832 from the previous year. Breakeven in sales dollars raises $1. 47 million to a total of $13. 12 million needed. 7. 0RecommendationsIn our analytic thinking of Hallstead Jewelers we found that Income was steadily declining and the move to the new location, with increased fixed costs, resulted in a loss for 2006. We implemented several options to see what va riances would occur. A consultant recommended a 10% reduction in prices which would lead to an increase in sales. We showed this to be a bad idea as operating income significantly decreased with the price reduction. Another idea was to eliminate sales commission. Eliminating sales commission greatly enhanced operating income and resulted in positive operating income for all three years.Michaela suggested increasing the advertising work out by $200,000. increase the advertising budget increased the breakeven in sales dollars by $465,190 if increasing the advertising budget results in increased sales it would be justifiable. ground on our analysis of Hallstead Jewelers we would recommend that they discontinue the practice of paying sales commissions. Although Gretchens father and grandfather perceived sales commission to give them a competitive edge and drive sales, calculations prove that the commission payments are definitely hurting Halsteads bottom line.Elimination of sales comm ission in 2006 would have resulted in $1,215,184 less in breakeven sales dollars. The companys realize and reputation should be asset enough to drive Hallstead Jewelers sales. In addition, we would recommend Hallstead Jewelers use $200,000 from the elimination of the sales commissions and apply it to increasing the advertisement budget combating stiff competition from large retailers such as Tiffany and Company and the internet business, Blue Nile.The increased advertising budget should be assessed on an yearly basis to validate its effectiveness. Works Cited Jiambalvo, James. Managerial Accounting 4th ed. parvenue Jersey John Wiley, 2010. Break-Even Analysis. Wikipedia Online http//en. wikipedia. org/wiki/Break_even_analysis. (11 APR. 2010) Contribution Margin. Wikipedia Online http//en. wikipedia. org/wiki/Contribution_margin. (10 APR. 2010)