Between 2003 and 2006, both the break-even point in dollars and sales tickets experienced growth. However, the increase was more pronounced from 2004 to 2006 compared to the period between 2003 and 2004. Specifically, the break-even point in sales tickets increased by $1615.80 from 2003 to 2004 and by $7623.90 from 2004 to 2006.
The initial increase can be attributed to higher fixed costs and a decrease in sales. The subsequent rise from 2004 to 2006 is primarily due to a substantial increase in fixed costs resulting from a larger store and higher rent, along with a greater increase in variable costs relative to sales leading to a decline in contribution margin.
In contrast, the margin of safety gradually decreased over time. This decline amounted to a reduction of 20% between 2003 and 2040, which further dropped by another47% between years
This decline can be attributedtothe significant increaseinthebreak-evenpointduring thoseyearsalongwithadecreaseinsalesyear after year within that same period.
If the company chooses to proceed with the new idea, it will yield a net income of $917.01. Furthermore, the break-even point for sales tickets would increase to $9105.56 and for dollar amount it would be $8,203.20.
Considering all other factors remain the same, assuming that everything remains constant, the increase in contribution margin per unit due to sales commissions being variable costs will result in a decrease in the break-even sales volume compared to 2006. The new break-even point will be $11,570.86 in sales tickets and $9,487 in sales dollars.
Increasing advertising leads to a higher break-even point, as advertising is a fixed cost. Assuming all other factors remain constant, the new break-even point would be $17 912.28 in sales tickets and $14 687.17 in sales dollars. However, advertising involves a certain level of risk as its outcome is uncertain. Given the current circumstances, I do not advise the sisters to pursue this option due to its inherent risks.
To break even in 2007 with the same fixed costs as in 2006, the average sales ticket needs to increase by $21, from $819 to $840.
The consultant’s idea of implementing a 10% price reduction at Hallstead Jewelers is highly recommended. This strategy aims to attract more visitors to the store and ultimately generate a profit of $900.90. Even in the case of potential obstacles, this option offers a significant 39% margin of safety, providing a substantial cushion from break-even sales. Comparatively, among all the options presented, this approach is the most secure and promises the highest potential profit.
