Hallstead Jewelry Case Study

September 9, 2017 Marketing

INTRODUCTION: Hallstead Jewelers is a family owned company that has been around for generations. After the death of their father Gretchen and Michaela resumed ownership of a business that had been very successful for many years. However, due to changes in the market related to competition, customer demand, and demographics, business has not been as profitable as the sisters hoped it would be upon taking over of (remove) the company. Michaela and Gretchen are now faced with the tough task of revitalizing the business.

They must first determine the best course of action to take after a decision to move to a new location that has proven to not be a key place for foot traffic and jewelry buyers. Michaela’s and Gretchen’s challenge is to determine a way to return to profitably all while not eliminating commission based pay; a strategy that their father and grandfather were totally against. RECOMMENDATION:  The recommendation for the managers at Hallstead would be to perform a marketing analysis of their customer base to determine its buying power.

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It would also be a good idea for the managers to get a better understanding of who their competitors’ are to determine the types of items that are being sold, that are doing well in their stores, as well as online and develop a new marketing strategy. Hallstead Managers should also reassess their decision to make a location change. By doing so, new ideas should be developed for re-attracting old customers and generating new ones to the new location. In addition, completely eliminating the sales commission may not be the appropriate thing to do either.

CONCLUSION:  In order to operate an effective and profitable business, it is imperative that the business owners perform the appropriate business analysis’ (Remove) before making decisions. In this case, the sisters should take into consideration that any decision regarding the commission should be based on the company’s profit versus sales. If the company does not make a profit (or has poor profit), it would not be a good business decision to reward employees since the commission paid reduces the overall profit.

The commission is an incentive to get employees to work harder. Therefore, removing it altogether could cause a less productive group of workers making already poor profit performance worse. RESULTS: The goal of this analysis is to determine the best way to make Hallstead Jewelers profitable again while rebuilding the success and brand name of the company as its past owners. The statistics needed to help address the sister’s concerns are listed in the Appendix section. APPENDIX:

Question 1: When determining how the margin of safety of change took place and the reason for which this changed occurred in the years 2003, 2004 and 2006, the calculations are as follows: Valuable Equations CM = S – V = Sales – Variable Costs CM Ratio = S – V/S Break-even Sales (Dollars)= Total Fixed Costs/Contribution Margin Break-even Sales (Units) = Profit + Total Fixed Costs/CM Margin of Safety = Expected Sales – Break-even Sales ____________________________________________________________ ____________ 003 2004 2006 Administrative Expenses 418 425 435 Rent 420 420 84 Depreciation 84 84 142 Salaries 2,021 2,081 3,215 Total Fixed Costs 2,573 3,010 4,632 Commissions 429 405 536 Advertising 254 250 257 Total Variable Costs = 683,000 55,000 793,000 CM for 2003 = 8,583,000 – 683,000 = 7,900,000 CM Ratio = 7,900,000/8,583,000 = . 92 CM for 2004 = 8,102,000 – 655,000 = 7,447,000 CM Ratio = 7,447,000/8,102,000 = . 919 CM for 2006 = 10,711,000 – 793,000 = 9,918,000 CM Ratio = 9,918,000/10,711,000 = . 926 2003 Break-even Sales (Dollars) = 2,573,000/. 92 = 2,796,739. 13 2004 Break-even Sales (Dollars) = 3,010,000/. 919 = 3,275,299. 2 2006 Break-even Sales (Dollars) = 4,632,000/. 926 = 5,002,159. 8 2003 Break-even Sales (Units/Tickets) = 0 + 2,573,000/7,900,000 = . 25 2004 Break-even Sales (Units/Tickets) = 0 + 3,010,000/7,447,000 = . 439 2006 Break-even Sales (Units/Tickets) = 0 + 4,632,000/9,918,000 = . 504 2003 Margin of Safety = 8,583,000 – 2,796,739 = 5,786,261 2004 Margin of Safety = 8,102,000 – 3,275,299 = 4,826,701 2006 Margin of Safety = 10,711,000 – 5,002,159 = 5,708,841 *The changes in margin of safety are due to sales volume changing causing the break-even sales dollar to change. The fluctuation causes the margin of safety to change since it is dependent on both of these variables.

Question 2: In order to compute the new breakeven point is sales tickets and sales dollars, we must break down the variable and fixed costs of which are in thousands. Please see figure 2-2 in the Appendix for the calculations. Based on the calculation, the new breakeven point in sales tickets is $2,435 and the breakeven in sales dollars is $3,063. 230. |Sales | |$ 9,639. 90 | | |Cost of goods sold* | | $ 5,570. 0 | *(cost of goods sold is based upon 2006 data | |Gross margin | | $ 4,069. 90 | since we have no inventory data. ) | | | | Commissions | | $ 482. 00 | (5 percent of sales, adapted to new sales number) | | Adversiting | | $ 257. 00 | | Administrative expense | $ 435. 00 | |Exhibit 2 Operating Statistics for 2007 | | Rent | | | $ 840. 0 | |Sales space (square feet) |15,280. 00 | | Depreciation | | $ 142. 00 | |Sales per square foot |$ |701. 00 | | Miscellaneous expenses | $ 122. 00 | |Sales tickets | |7,500. 00 | | Total expenses | | $ 5,547. 00 | |Average sales ticket |$ |1,285. 00 | |Net income |  | $ (1,477. 0) | | | | | | APPENDIX Figure 2-2 Cost Breakdown (in thousands and Breakeven Analysis) |Cost Breakdown in Thousands | | | | | |VARIABLE | | |FIXED | | | |Sales commission | $ 482. 00 | |Rent | | $ 840. 0 | |Advertising | $ 257. 00 | |Depreciaton | $ 142. 00 | |Total variable cost | $ 739. 00 | |Salaries | | $ 3,215. 00 | | | | | |Administration Exp. | $ 435. 00 | |OTHER | | | |Total fixed cost | $ 4,632. 0 | |Miscellaneous | $ 122. 00 | | | | | |Total other cost | $ 122. 00 | | | | | | | | | | | | | |Variable cost per unit = $4,632,000 (TFC) / 7,500 (sales tickets) | | |Variable cost per unit = $617. 0 | | | | | |Selling price per unit =$1,285 |(sales $9,639,900/7500 number of units) | | | | | | | | | |With prices reduced, the new breakeven point in sales tickets is 2,434. 56 or $2,435 rounded up. | |New break even point in sales tickets | | | | | Profit = SP(x) – VC(x) – TFC | | | | | 0 = $1,258x – $617. 60 – $4,632,000 | | | | $1,285x = $617. 60x – $4,632,000 | | | | |$1,285x + $617. 0x = $4,632,000 | | | | | |$1,902x / $1,902. 60 = $4,632,000 / $1,902. 60 | | | | | x = $2,434. 56 | | | | | | | | | | | | | |With the price reduced, the new breakeven point in sales dollars is $3,063,230. | breakeven point in sales dollars = quantity * selling price | | | | x = 2,435 * $1,285 | | | | | | x = $3,063,230 | | | | | Question 3: When making the decision to eliminate the sales commission, the sisters pondered with understanding the effect of the breakeven volume?

Looking at this scenario, the total sales amount is the break-even volume in units times the unit sales price value, therefore the total sales shows the direct labor costs for the break-even volume. The cost-profit-volume analysis, is the process of calculating the profits of a business at different volumes, or revenue levels. The break-even analysis, which is a component of profit volume analysis, is the calculation of the revenue level at which a business shows neither a profit nor a loss.

In this case, it would be in the best interest of the managers to examine the cost and profits which is critical because they include unit price, variable costs, fixed costs, and cost varying with profits. The second step would be to calculate the unit sales price. And third, identify the costs with revenue and variable costs. The final step should be to determine your fixed costs, which stay constant, within the range of business volumes. The contribution margin calculates the revenues minus the variable costs and profit.

In conclusion, based on the outcome of the calculations, eliminating the sales commission would not be a good decision simply because the company’s breakeven point would be $1,400,868 which would result in a negative impact to the business overall. Breakeven Point in Dollars = (SP-VC)*X – FC x = ($27,396 – $12,984) = $14,412 x = 0. 833 – $982 = $981 x = $1,428 X $981 x = $1,400,868 X= Units needed to breakeven SP= Unit selling price VC = Unit variable costs FC= Total annual fixed costs Breakeven: X= FC = $982 = 0. 833 CM $11,788 Selling Price $27,396

Variable Costs $12,984 $14,412 Fixed Costs $982 Revenue $1196 Variable Costs $12,984 Contribution Margin $11,788 Question 4: If the sisters were to expand and increase the advertising by $200,000, the breakeven point would increase profits by $605,959. Therefore the recommendation would be to increase the advertising from local and global level in order to retain visibility of the company as it moves forward with recovering the business. Profit = Selling Price(x) – Total Variable Cost – True Fixed Cost $1,553(6,897) – (5,570,000) – (5,547,000 + 200,000) = $605,959 The breakeven point would increase by $605,959. Question 5: In order to determine how much the average sales tickets should increase should the total fixed cost remain the same in 2007 as it was in 2006, the calculations are as follows: The Standard profit equation shows us that: Profit = Selling Price (X) – Total Variable Cost– True Fixed Cost – (X) = unit sold Profit = $0, because that would be the “break-even point” Selling Price = The new average sales ticket, which is what we want to find out.

Variable Cost = $5,570,000 (COGS) Total Fixed Cost = $5,547,000 (Selling Expenses) (X) = 6,897 sales tickets Thus, $0 = (Selling Price x 6,897) – ($5,570,000) – ($5,547,000) $11,117,000 = (Selling Price x 6,897) Selling price = $11,117,000 / 6,897 Selling Price = $1,612. So if their average sales tickets increase by $59, they would break-even. ($1,612 – $1,553 = $59. ) REFERENCES (n. d. ) Building a Profit Volume and Breakeven Analysis. Acquired August 7, 2010. URL: http://www. stephenlnelson. com/MBAxlch11. pdf

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