Hallstead Jewelers

1. These numbers are variable costs because there per unit cost is roughly the same regardless of the activity level. Fixed Costs are selling salaries, selling advertising, administrative expenses, rent and depreciation, because the total fixed cost basically remained constant (+/- a few dollars) regardless of activity levels. The total fixed cost per unit also decreased with activity increased and increased when activity decreased as represented by the change in decrease in sales that occurred in 2009 and the increase in 2011. A large number of fixed costs increased when Hallstead changed locations and hired new staff in 2011.

2. The margin of safety decreased from 2008 to 2009 because sales dropped in 2009 while fixed costs and variable costs slightly increased. Fixed costs are affected small changes in sales because these costs mostly remain constant regardless of sales volume. So, when sales drop as they did in 2009, Hallstead still had to cover the same fixed costs. In 2011, the margin of safety is low because of the change in fixed expenses that are a direct result of staff and space increases from the new store. The new store changed the break-even units because more sales are necessary to cover the variable and new fixed costs.

3. With reduced prices and a slightly increased sales volume, the new NI = ($511,578). A 4% decrease in price seems small, but it changes the average sales price (high-low method) from $815.48 to about $782.86. The $32.62 decrease in price pushed Hallstead into further debt in this situation because sales volume didn’t increase (increase of 937 units) enough to cover the price decrease. Prior to the price change, the break-even volume was 14,162. In this situation, the new break-even volume is about 15,670 units, thus proving that increasing sales tickets to 14,000 units is not sufficient to improve their businesses standing as it can’t cover the price reduction.

4. Cutting advertising costs by $200,000 would decrease the...