Hallstead Jewelers

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?

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 within these years. 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, a constant level of expected sales is assumed. If the expected level of sales remains constant, the break-even sales point will increase as the margin of safety decreases. Within these years, the margin of safety changed from 15%, 6%, to -9%. As shown in Table 1, fixed costs increased along with the break-even sales point and sales did not meet expectations, therefore the company reported a loss in 2006. This was caused by an increase in salaries (larger storage room), administrative expenses, miscellaneous expenses, depreciation (increase in assets from the larger store), and rent expenses (new store); which all caused an increase in fixed costs and break-even sales.

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