Hallstead Jewelers

Course Name: ACCT801                 Name: Yue Ren                       UDID:702265016

Executive Summary Case Analysis Questions

Fall – 15F

(3 pgs; double-spaced; 7 pts.)

Hallstead Jewelers

For the following questions, assume the budget for 2007 uses the 2006 figures from Exhibit 1.  ( Note: all the results may be in thousands of dollars)

1. Calculate the contribution margin for 2007.  (Assume that Cost of Goods Sold and Sales Commissions are variable costs and that the other costs are fixed.)

Since the only variable costs here are the cost of goods sold and sales commissions, the contribution margin for 2007 based on 2006 figures will be the total sales minus the variable costs. That is $10711-$5570-$536= $4605.

Thus the contribution margin for 2007 is $4605.

1. If they change their advertising emphasis without changing the cost of advertising, how much will sales (in sales dollars) have to increase in order for Hallstead to break-even?

If the cost of advertising has not been changed, in order to calculate the break-even point, we firstly need to know the contribution per unit, which can be generated by (sales - fixed cost)/ total sales= $4605/$10711=42.99%

We know that the fixed cost equals to the sum of salaries, advertising, administrative expenses, rent, depreciation and miscellaneous expenses. Then then fixed cost = $3215+$257+$435+$840+$142+$122= $5011

Since we know the sales of break-even point equal to the total fixed cost/ contribution per dollar of sales, which is $5011 /42.99%= $11656.19

Then the difference between the break-even point and the current sales is $11656.19-$10711=$945.19

This means that the sales have to increase by $945.19 in order for Hallstead to break-even.

1. Now assume Hallstead finds a new supplier of diamonds who provides high quality diamonds at a lower cost.  This will enable them to reduce Cost of Goods Sold by 20%.  What must dollar sales be for Hallstead to earn a profit of $1,500?

Because the lower cost for supply, the new cost of goods sold now is $5570*80%= $4456

The new contribution margin = $10711-$4456-$536= $5719

The new contribution per unit changes as follows: (sales - fixed cost)/ total sales = $5719 / $10711 = 53.39%

The fixed cost here remains at the same level as the previous condition, which is $5011, which is the sum of all fixed items ($3215+$257+$435+$840+$142+$122)