89 Fixed Costs

$1,996,000

Breakeven point ($)

$15,353,846

Breakeven point (tickets)

9,886.57

Actual # of tickets

Margin of Safety

-2990

This shows that the new breakeven point for sales would be 9887 tickets, or $15,353,846. Thus, the increased advertising spending would need to increase ticket sales by 2990 over current levels, as that is the new margin of safety.

5. Sales in dollars would need to be $13,815,385 in order for Hallstead to break even in 2007, if all cost figures remained as they were in 2006. If it is assumed that the number of tickets is to remain the same, then the average ticket would need to increase. The fixed costs are $1,796,000. These should be divided by the number of tickets -- 6897 -- giving an average contribution of $260.40 needed to break even. If it assumed that all variable costs remain the same, then the average ticket price will need to increase by the same amount that the contribution margin needs to increase. In this case, that figure is:

$260.40 - $201.89 = $58.51

This would give the store an average ticket of $1,611. This average ticket level is roughly the same as the store had in 2003, a year in which Hallstead turned a profit and had a healthy margin of safety.

6. From this analysis, the most logical recommendation is that Hallstead should focus on increasing its average ticket, and on reducing its variable costs. The average ticket has slipped from $1,607 in 2003 to $1,553 in 2006, a drop that has knocked $54 from its contribution margin. The remaining reduction in contribution per ticket has come from rapidly escalating variable costs. It is assumed that the fixed costs are more difficult to change, largely because the increase in fixed costs was specifically related to the move to the newer, larger store.

Variable...

The company's cost of goods sold has not changed significantly -- in 2003 it was 50.4% and in 2006 it has actually increased to 52%. Salaries, however, increased from $2,021,000 to $3,215,000, an increase of 59%. Sales only increased 24.7% over the same time period. It is recommended, therefore, that Hallstead reduce salaries by 25%, in addition to restoring the previous product lines that had delivered the higher average tickets prior to the move. In boosting the average ticket to $1,575 and reducing the salaries 25%, the financials for Hallstead improve dramatically.
Hallstead

Breakeven Analysis

2007

Sales

$10,862,775

Avg ticket

$1,575

Variable costs % of sales

87%

Average Variable Costs

$1,247.22

Contribution per ticket

$327.78

Fixed Costs

$1,796,000

Breakeven point ($)

$8,629,874

Breakeven point (tickets)

5,479.28

Actual # of tickets

Margin of Safety

The company would have a breakeven number of tickets of 5479, with actual sales tickets of 6897. The breakeven sales in dollars would be $8,629,874 versus expected sales in dollars of $10,862,775. The recommended strategy delivers a margin of safety of 1418 tickets, the highest since 2003. Thus, it is recommended that Hallstead reduce salaries by 25% and increase the average ticket to $1,575 in order to regain profitability. The firm's total cost structure is reduced by targeting the one cost element that has risen faster than sales and is negotiable (unlike, for example, the rent expense). The decision to offer lower-priced items reduced the average ticket too much, so this decision has been reversed. Combined, the two…