The Sales Breakeven Point - Admission/Application Essay Example

Case study: Hallstead Jewelers The sale tickets for the Hallstead Jewelers were relatively constant before the move to the new location, but increased slightly with the move to the new business premise. The sales breakeven point is the point at which the sales is able to cover all the expenses so that beyond that point the firm makes a profit while below the point the firm incurs losses, while the sales ticket breakeven point is the number of tickets that need to be sold to be able to meet the total expenses of the firm. The sales breakeven point and the unit breakeven point are directly related so that an increase in one causes an increase in the other. For the year 2003, the break even sales was the total selling expense added by the cost of goods sold: 3679+4326=8005 This being the total expense, the firm has to make revenue equal to it to be able to break even. Given sales $8583 and sales tickets as 5341, the cost per ticket is arrived at as follows: $8583/5341=$1.6 Thus the break even number of sales tickets is: 8005/1.6=5003 tickets For the year 2004, The break even in sales is: 4132+3758=7890 Cost per unit sale ticket is: 8102/5316=$1.52 Thus the break even number of sales ticket is: 7890/1.52=5191 units of sales tickets For the year 2006, Sales break even is: 5570+5547=11117 Cost per unit sales ticket is 10711/6897=1.55 Break even sales tickets = 11117/1.55= 7172 sales tickets The break even sales are dollars has reduced from the year 2003 to 2004. This is attributable to the reduction in the cost of goods sold resulting from the reduction in the goods sold in the year 2004 compared to the year 2003. However, the break even sales tickets have increased in the year 2004 in comparison with 2003 from the data above. This is attributed to the increase in selling cost while the total sales has decreased thus more units are sold to meet the increasing expense. In the year 2006, the sales break even has increased due to the increase in total expenses while the break even tickets has also increased to cover the increasing expense. The margin of safety has also been decreasing over time so that in 2003 it was $578 and it came down in 2004 to $212 then going negative in the year 2006 by $ 406. The reduction in margin of safety in the first two years is attributable to the general fall in sales. However, in 2006, the sales increased but the expense also increased with a higher proportion than the sales so that the end result is a loss to the firm. Question 2 With reduction of prices by 10% comes the increase in unit sales to 7500. This is an increase of 703 units from the 6897 units in 2006. Given that the sales for 2006 were $10711 and the sales tickets were 6897, the cost per unit sale ticket is arrived at as: 10711/6897= 1.55 Reducing this amount by ten percent to incorporate the reduction in prices by ten percent will give: 1.55-(0.01*1.55) =1.53 This is the new cost of unit sales ticket. To obtain the new sales, we multiply the new price by the resultant number of sales tickets: 1.53*7500=11475 Making the assumption that 50% of the sales are the cost of the sales, the gross margin will be: 11475/2=5737.5 The second assumption is that the other expenses remain constant except the sales commission so that the new commission is arrived at through awarding $1 for sales of $20 (this is arrived at through dividing total amount of sales for each year, respectively by their respective commission so that the results gave a ratio of sales to commission as $20:1). The new sales commission will be: 11475/20=573.75 Difference with commission from 2006 is 576.75- 536=37.75 Thus the total selling expenses will increase by $37.75 to $5584.75 Thus the net margin will be the difference between gross margin and expenses 5737.5-5584.75=152. 75 This shows the company’s income will increase as a result of reducing prices to increase sales. The breakeven point in sales will be the total selling expense added to the cost of sales 5737.5+5584.75=11322.25. To achieve this at a price of 1.53 per unit, the break even in sales tickets will be: 11322.25/1.53=7400 units. Question 3 Elimination of sales commission will affect the break even volume. With every sale of $20, a commission of $1 is paid thus eliminating the sales commission will see a reduction in the break even volume through the reduction of selling expense. Using the data from 2006, elimination of the sales commission will see the reduction in the total cost to: Selling expense: 5547-536= 5011 Breakeven point will be at the point where sales equals cost of sales plus selling expense 5011+5570=$10581 Having derived the cost of unit sales ticket as 1.55, the break even volume will be: 10581/1.55=6826units Question 4 Advertising is one strategy that firms use to increase sales. However, this comes with a cost that needs to be taken care lest it blow expenses out of proportion; the cost of advertising increases the breakeven point so that the costs of selling increases while the break even volume also goes up. Using the 2006 financial information, increasing advertising by $200,000 will affect the breakeven point: Having had the sales breakeven point for 2006 as 11117, this value will go up by 200,000 to 211117. The break even quantity will also increase to 211117/1.55=136204. This is way beyond the annual sales of 10711 in 2006. The expense will be too much for the firm to withstand thus I would advise them to abandon the advertising proposal. Question 5 The breakeven sales tickets for the year 2006 were 7172 sales tickets but the actual sales tickets were 6897 so that the firm had a loss. For the firm to break even in 2007 given that the fixed cost remain same as 2006 the sales tickets will have to increase by: 7172-6897=275. The average sales ticket is arrived at from: sales space*sales per square foot/ sales ticket. Thus for 2007 it will be: (15280*701)/7172=1493 Question 6 For the managers of Hallstead jewelers, I recommend the adoption of current trend in jewelry trade to keep up with the pace of its competitors. Depending solely on store customers may not give the firm enough revenue thus the need global conquest of markets through the internet. The firm can reduce prices to attract more customers thus increasing sales. With the entrance of new firms into the market, the managers need to work on their marketing to restore their brand name in the market keeping in mind that they are no longer the best thus they need to work towards being the best. Rebranding of their products may also work to attract new customers. Also, expanding should not be limited to the size of the store but the managers should consider opening other small branches in other streets to bring their products closer to consumers. Work cited Bruns W. J. (2007). Hallstead Jewellers. Havard business school. Read More