Hallstead Jewelers Case Break Even Changes Over the course of the given years, the margin of safety has steadily decreased, going from 14% in 2003, to 6% in 2004, to -6% in 2006. The change can be attributed to rising costs relative to the change in revenue. From 2003 to 2004 sales decreased by 6%, yet costs of goods sold only decreased by 4%. In 2006, sales dramatically rose to 10,711, constituting a 24% increase in revenue. Unfortunately, cost of goods sold(COGS) increased by 26%, and total expenses increased by 31%. The increased COGS and expense explains how revenue could rise, yet the margin of safety could decrease. Reduce Prices If average ticket prices were reduced by 10% and sales tickets increased from 14,000 after year 2006, …show more content…
Increasing the number of fixed costs will directly increase the break even volume because Break-Even Point = Total Fixed Costs ÷ Contribution Margin per Unit. (In Table C, the break even volume in years 2003, 2004, and 2006 is greater than that of Table A.) This indicates a higher risk for Hallstead Jewellers because with a higher fixed cost structure, they need to increase the required sales level to earn their target profit. Although the break even volume has significantly risen after increasing advertising costs, we believe that Hallstead should increase advertising costs. Considering that the retail jewelry business is changing with the rise of “international powerhouses” like Tiffany & Company and online jewelry stores such as Blue Nile - Hallstead is at a competitive disadvantage. It is explicitly mentioned that the “sisters had not had time to think about what those trends meant for Hallstead’s”. Therefore, the recommended course of action would be to utilise advertising costs to focus on attracting specific crowds rather than the broader market (which is what its competition has been doing). This way they can tailor their products to suit the customer’s demands, increasing the value of each customer. By specialising on quality products targeting key