Explore BrainMass
Share

Explore BrainMass

    Managerial Accounting.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Hallstead Jewelers
    Managerial Accounting

    Summary of Hallstead Jewelers
    Hallstead Jewelers was established in 1924 in the largest city in the tri-state region. For more than 50 years, Gretchen Reeves and her brother and sister's grandfather ran and grown the original store to one of the largest jewelry and gift stores in the United States. The stores were broken down into four departments: tabletop gifts (china and flatware), watches, fine jewelry and gems, and artistic gifts. Gretchen's father took over the business once her grandfather passed away. In 2002, Gretchen's father passed away and the business was inherited by three of his children (James, Gretchen, and Michaela). Sales began to stagnant in 1999 and profits began to slip as the once popular shopping designation on Lake Avenue and Second Avenue shifted two blocks west to Washington Street. In 2004, Hallstead Jewelers moved two blocks away to an old abandoned toy seller on the corner of Washington Street and Second Avenue. Gretchen and Michaela believed after the move will be finished at the beginning of 2006 and since the move would take most of the 2005 fiscal year that it would be a "lost year". However, after the renovations they believed things would turn around. They are several macroeconomic events that were currently in effect. Two rivals were growing and taking away market share. Tiffany & Company had grown like Hallstead Jewelers into a well-established global jewelry retail store and Blue Nile had established themselves as the leader in jewelry sales over the Internet. In 2006, net income dropped to a loss of $406 thousand dollars and Michaela and Gretchen decided a change in strategy was in order. Gretchen and Michaela had several questions for the accountant to analyze to help come up with a strategy.

    Questions from Michaela and Gretchen
    How has the breakeven point in 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?
    One idea that the consultant had was to reduce prices to bring in more customers. If average prices were reduced ten percent (10%), and the number of sales tickets (unit sales) increased to 7,500, would the company's income be increased? With prices reduced, what would be the new breakeven point in sales tickets and sales dollars?
    Another idea that Gretchen had was to eliminate sales commissions. Hallstead's was the only jewelry store in the city that paid sales commissions, and although both Grandfather and Father had 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?
    Michaela felt that a bigger store could benefit from greater advertising and suggested that they increase advertising by $200,000. How would this affect the breakeven point? Would you recommend that the sisters try this?
    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?
    What do you recommend that the managers at Hallstead Jewelers do?

    Responses from Accountant
    Question #1
    The break-even point in the number of sales tickets for 2003, 2004, and 2006 are 4,535, 5,000, and 7,505 respectively. The break-even point in sales dollars for 2003, 2004, and 2006 are $7,287,043, $7,620,696, and $11,655,277 respectively. The margin of safety is the difference between the expected level of sales and break-even sales. Since there is no expectation of sales mentioned in the case report, we will assume a constant level of expected sales. If the expected level of sales remains constant then as break-even sales increase the margin of safety will decrease. As we see in table 1, as fixed costs increased along with the break-even sales point, actually sales did not meet expected and the company reported a loss in 2006. This was caused by an increase in salaries (larger store room), increase in administrative expenses, increase in miscellaneous expenses, increase in depreciation (increase in assets from the larger store), and an increase in rent (new store); which all lead to an increase in fixed costs and an increase in break-even sales. See calculations in Table 1.

    Table 1: Break-even Sales Calculations (thousands of dollars)
    2003 2004 2006
    Sales $8,583 $8,102 $10,711
    Less variable costs:
    Cost of goods sold 4,326 4,132 5,570
    Commissions 429 405 536
    Total variable costs 4,755 4,537 6,106
    Contribution margin $3,828 $3,565 $4,605
    Contribution margin ratio 0.4460 0.4400 0.4299
    Less fixed costs
    Salaries 2,021 2,081 3,215
    Advertising 254 250 257
    Administrative expenses 418 425 435
    Rent 420 420 840
    Depreciation 84 84 142
    Miscellaneous expenses 53 93 122
    Total fixed costs $3,250 $3,353 $5,011
    Profit $578 $212 $(406)

    2003 2004 2006
    Sales tickets 5,341 5,316 6,897
    Average sales ticket $1,607 $1,524 $1,553
    Average cost of goods sold $810 $777 $808
    Average Commissions $80 $76 $78
    Average variable costs $890 $853 $885
    Contribution margin $717 $671 $668
    Contribution margin ratio 0.4460 0.4400 0.4299
    Total fixed costs $3,250,000 $3,353,000 $5,011,000
    Break-even sales tickets 4,535 5,000 7,505
    Break-even sales dollars $7,287,043 $7,620,696 $11,655,277

    Question #2
    If average prices were reduced by 10% and this caused the number of sales tickets to increase to 7,500, then net income for 2007 would be forecasted at a loss of $1,045,000. See calculations in Table 2. The new break-even point in sales tickets would be 9,475 tickets and the new break-even sales dollars would be $13,314,712.

    Table 2: Price Reduction Effect on Net Income and Break-even Point (thousands of dollars)
    2003 2004 2006 2007 (Forecast) Difference 2006 to 2007
    Sales $8,583 $8,102 $10,711 $10,539 ($172)
    Less variable costs:
    Cost of goods sold 4,326 4,132 5,570 5,987 $417
    Commissions 429 405 536 586 $50
    Total variable costs 4,755 4,537 6,106 6,573 $467
    Contribution margin $3,828 $3,565 $4,605 $3,966 ($639)
    Contribution margin ratio 0.4460 0.4400 0.4299 0.3764 -0.0536
    Less fixed costs $0
    Salaries 2,021 2,081 3,215 3,215 $0
    Advertising 254 250 257 257 $0
    Administrative expenses 418 425 435 435 $0
    Rent 420 420 840 840 $0
    Depreciation 84 84 142 142 $0
    Miscellaneous expenses 53 93 122 122 $0
    Total fixed costs $3,250 $3,353 $5,011 $5,011 $0
    Profit $578 $212 $(406) $(1,045) $(639)

    2003 2004 2006 Average 2007
    Sales tickets 5,341 5,316 6,897 5,851 7,500
    Average sales ticket $1,607 $1,524 $1,553 $1,561 $1,405
    Average cost of goods sold $810 $777 $808 $798 $798
    Average Commissions $80 $76 $78 $78 $78
    Average variable costs $890 $853 $885 $876 $876
    Contribution margin $717 $671 $668 $685 $529
    Contribution margin ratio 0.4460 0.4400 0.4299 0 0.3764
    Total fixed costs $3,250,000 $3,353,000 $5,011,000 $3,871,333 $5,011,000
    Break-even sales tickets 4,535 5,000 7,505 5,680 9,475
    Break-even sales dollars $7,287,043 $7,620,696 $11,655,277 $8,854,339 $13,314,712

    Break-even Point
    Break-even sales tickets old 7,505
    Break-even sales dollars old $11,655,277
    Break-even sales tickets new 9,475
    Break-even sales dollars new $13,314,712
    Difference in break-even sales tickets 1,970
    Difference in break-even sales dollars $1,659,436

    Question #3
    If Gretchen eliminated the sales commissions at Hallstead's Jewelers the net income for 2013 through 2016 would increase and the break-even point for tickets and sales would decrease. Net income would increase in 2013, 2014, and 2016 respectively to $1,007,000, $617,000, and $130,000. Break-even point in sales tickets would decrease in 2013, 2014, and 2016 respectively to 4,078, 4,490, and 6,723. Break-even point in sales dollars would decrease in 2013, 2014, and 2016 respectively to $6,552,688, $6,843,188, and $10,440,109. See Table 3 for calculations.
    Table 3: Elimination of Commissions Effect on Net Income and Break-even Point (thousands of dollars)
    2003 2004 2006
    Sales $8,583 $8,102 $10,711
    Less variable costs:
    Cost of goods sold 4,326 4,132 5,570
    Commissions 0 0 0
    Total variable costs 4,326 4,132 5,570
    Contribution margin $4,257 $3,970 $5,141
    Contribution margin ratio 0.4960 0.4900 0.4800
    Less fixed costs
    Salaries 2,021 2,081 3,215
    Advertising 254 250 257
    Administrative expenses 418 425 435
    Rent 420 420 840
    Depreciation 84 84 142
    Miscellaneous expenses 53 93 122
    Total fixed costs $3,250 $3,353 $5,011
    Profit $1,007 $617 $130

    2003 2004 2006
    Sales tickets 5,341 5,316 6,897
    Average sales ticket $1,607 $1,524 $1,553
    Average cost of goods sold $810 $777 $808
    Average Commissions $0 $0 $0
    Average variable costs $810 $777 $808
    Contribution margin $797 $747 $745
    Contribution margin ratio 0.4960 0.4900 0.4800
    Total fixed costs $3,250,000 $3,353,000 $5,011,000
    Break-even sales tickets 4,078 4,490 6,723
    Break-even sales dollars $6,552,688 $6,843,188 $10,440,109

    2003 2004 2006
    Break-even sales tickets old 4,535 5000 7505
    Break-even sales dollars old $7,287,043 $7,620,696 $11,655,277
    Break-even sales tickets new 4,078 4,490 6,723
    Break-even sales dollars new $6,552,688 $6,843,188 $10,440,109
    Difference in break-even sales tickets (457) (510) (782)
    Difference in break-even sales dollars -$734,355 -$777,508 -$1,215,168

    Question #4
    If Michaela increased advertising from $257,000 to $457,000 (increase of $200k), then break-even sales tickets will increase to 7,805 and break-even sales dollars to $11,655,277. I would only recommend increasing advertising by $200,000 if she knows that this will increase sales in items from 6,897 to at least 7,505 or by 8.8% (Break-even sales ticket). See Table 4 for calculations.
    Table 4: Increase in Advertising Effect on Break-even Point (thousands of dollars)
    2003 2004 2006 2007 (Forecast)
    Sales $8,583 $8,102 $10,711 $10,711
    Less variable costs:
    Cost of goods sold 4,326 4,132 5,570 5,570
    Commissions 429 405 536 536
    Total variable costs 4,755 4,537 6,106 6,106
    Contribution margin $3,828 $3,565 $4,605 $4,605
    Contribution margin ratio 0.4460 0.4400 0.4299 0.4299
    Less fixed costs
    Salaries 2,021 2,081 3,215 3,215
    Advertising 254 250 257 457
    Administrative expenses 418 425 435 435
    Rent 420 420 840 840
    Depreciation 84 84 142 142
    Miscellaneous expenses 53 93 122 122
    Total fixed costs $3,250 $3,353 $5,011 $5,211
    Profit $578 $212 $(406) $(606)

    2003 2004 2006 2007
    Sales tickets 5,341 5,316 6,897 6,897
    Average sales ticket $1,607 $1,524 $1,553 $1,553
    Average cost of goods sold $810 $777 $808 $808
    Average Commissions $80 $76 $78 $78
    Average variable costs $890 $853 $885 $885
    Contribution margin $717 $671 $668 $668
    Contribution margin ratio 0.4460 0.4400 0.4299 0.4299
    Total fixed costs $3,250,000 $3,353,000 $5,011,000 $5,211,000
    Break-even sales tickets 4,535 5,000 7,505 7,805
    Break-even sales dollars $7,287,043 $7,620,696 $11,655,277 $12,120,464

    Break-even Point
    Break-even sales tickets old 7,505
    Break-even sales dollars old $11,655,277
    Break-even sales tickets new 7,805
    Break-even sales dollars new $12,120,464
    Difference in break-even sales tickets 300
    Difference in break-even sales dollars $465,188

    Question #5

    If fixed costs and the number of sales tickets remained the same in 2007 as it was in 2006, then the average sales ticket would have to increase from $1,524 to $2,091 to break-even. See Table 5 for calculations.

    Table 5: Increase in Average Sales Ticket Effect on Break-even Point
    2003 2004 2006 2007 (Forecast)
    Sales $8,583 $8,102 $10,711 $11,117
    Less variable costs:
    Cost of goods sold 4,326 4,132 5,570 5,570
    Commissions 429 405 536 536
    Total variable costs 4,755 4,537 6,106 6,106
    Contribution margin $3,828 $3,565 $4,605 $5,011
    Contribution margin ratio 0.4460 0.4400 0.4299 0.4508
    Less fixed costs
    Salaries 2,021 2,081 3,215 3,215
    Advertising 254 250 257 257
    Administrative expenses 418 425 435 435
    Rent 420 420 840 840
    Depreciation 84 84 142 142
    Miscellaneous expenses 53 93 122 122
    Total fixed costs $3,250 $3,353 $5,011 $5,011
    Profit $578 $212 $(406) $-

    2003 2004 2006
    Sales tickets 5,341 5,316 5,316
    Average sales ticket $1,607 $1,524 $2,091
    Average cost of goods sold $810 $777 $1,048
    Average Commissions $80 $76 $101
    Average variable costs $890 $853 $1,149
    Contribution margin $717 $671 $942
    Contribution margin ratio 0.4460 0.4400 0.4507
    Total fixed costs $3,250,000 $3,353,000 $5,011,000
    Break-even sales tickets 4,535 5,000 5,317
    Break-even sales dollars $7,287,043 $7,620,696 $11,118,516

    Profit=SP(x)-VC(x)-TFC
    0=SP(5,316)-$1,149(5,316)-$5,011,000
    SP(5,316)=$11,119,084
    SP=$2,091.63

    Question #6

    Exhibit 1: Hallstead Jewelers; Income Statements for Years Ended January 31 (thousands of dollars)
    2003 2004 2006
    Sales $8,583 $8,102 $10,711
    Cost of goods sold 4,326 4,132 5,570
    Gross margin $4,257 $3,970 $5,141
    Expenses
    Selling expense
    Salaries 2,021 2,081 3,215
    Commissions 429 405 536
    Advertising 254 250 257
    Administrative expenses 418 425 435
    Rent 420 420 840
    Depreciation 84 84 142
    Miscellaneous expenses 53 93 122
    Total expenses $3,679 $3,758 $5,547
    Net income $578 $212 $(406)

    Exhibit 2: Hallstead Jewelers Operating Statistics
    2003 2004 2006
    Sales space (square feet) 10,230 10,230 15,280
    Sales per square foot $839 $792 $701
    Sales tickets 5,341 5,316 6,897
    Average sales ticket $1,607 $1,524 $1,553

    © BrainMass Inc. brainmass.com October 10, 2019, 8:04 am ad1c9bdddf
    https://brainmass.com/business/business-policy-and-implementation/managerial-accounting-606676

    Attachments

    Solution Preview

    Question #6

    What do you recommend that the managers at Hallstead Jewelers do?

    Exhibit 1: Hallstead Jewelers; Income Statements for Years Ended January 31 (thousands of dollars)
    2003 2004 2006
    Sales $8,583 $8,102 $10,711
    Cost of goods sold 4,326 4,132 5,570
    Gross margin $4,257 $3,970 $5,141
    Expenses
    Selling expense
    Salaries 2,021 2,081 3,215
    Commissions 429 405 536
    Advertising 254 250 257
    Administrative expenses 418 425 435
    Rent 420 420 840
    Depreciation 84 84 142
    Miscellaneous expenses 53 93 122
    Total expenses $3,679 $3,758 $5,547
    Net income $578 $212 $(406)

    Exhibit 2: Hallstead Jewelers Operating Statistics
    2003 2004 2006
    Sales space (square feet) 10,230 10,230 15,280
    Sales per square foot $839 $792 $701
    Sales tickets 5,341 5,316 6,897
    Average sales ticket $1,607 $1,524 $1,553

    For Instructional Purposes Only. This ...

    Solution Summary

    The expert provides recommendations to improve an organization's bottom line.

    $2.19