We see an increase in the break-even point, both in dollars and in sales tickets, from year 2003 to 2006. This increase is not as dramatic between the years 2003 and 2004 as it is between 2004 and 2006. The increase in break-even point in sales tickets is 1615,80 and 7623,90 respectively. The increase in the first year is due to the increase in fixed costs and also the decrease in sales. The increase between 2004-2006 is due to the dramatic increase of fixed costs because of the bigger store and higher rent and the decrease in contribution margin that is caused by the greater increase in variable costs than sales.
The margin of safety on the other hand gradually decreased. The decrease between 2003-04 and 2004-06 are 20% and 47% respectively. The reason for that is the huge increase in break-even point between 2004 and 2006 and the decrease in sales for the years 2003-2004.
If the company were to pursue that new idea, the net income of the company would increase to $917,01. The new break-even point would be 9105,56 in sales tickets and $8.203,20 in dollar amount.
Assuming that everything stays constant, because sales commissions are variable costs, if will increase the contribution margin per unit which will end up decreasing the break-even sales volume compared to 2006. The new break-even point would be 11 570,86 in sales tickets and $9487 in sales dollars.
Because advertising is a fixed cost, an increase in advertising will cause an increase in break-even point. The new break-even point, everything else staying the same, would be 17 912,28 in sales tickets and $ 14.687,17 in sales dollars. Because the outcome of advertising is not certain, it carries a certain amount of risk. I would not recommend that the sisters try this because it is risky for the situation that they are in now. The average sales ticket have to increase to $840 from $819 ($21 increase) to break-even if the fixed costs remained the same in 2007 as it was 2006.
I would recommend the managers at Hallstead Jewelers to go with the idea of the consultant, the %10 price reduction in order to increase the number of people visiting the store. If everything goes according to the plan, they can have a profit of $900,90 and even if it doesn’t goes as smoothly as planned, this option has a 39% margin of safety, so it has a large portion of the break even sales to fall back on. Among the options given, this one is the safest and the one that will provide the highest profit.