Hallstead Jewelers
Managerial Accounting ACCT 2301 – Case Analysis 1
September 29, 2010
Melissa Ng
Variable costs are made up of cost of goods sold plus sales commissions. Fixed costs are made up of salaries, advertising, administrative expenses, rent, depreciation, and miscellaneous expenses.
Assuming all questions are answered independently: 1. Income statement using the contribution approach: | 2004 | 2005 | 2007 | Sales | $8,583,000 | $8,102,000 | $10,711,000 | Less: Variable Costs | $4,669,000 | $4,456,000 | $5,998,000 | Contribution Margin | $3,914,000 | $3,646,000 | $4,713,000 | Less: Fixed Costs | $3,180,000 | $3,283,000 | $4,971,000 | Net Income | $734,000 | $363,000 |…show more content… The change in variable cost also affects the contribution margin per unit positively. It increases the contribution margin per unit, resulting in an increase in profit for every unit sold. 4. New income statement using the contribution approach: | 2004 | 2005 | 2007 | Sales | $8,583,000 | $8,102,000 | $10,711,000 | Less: Variable Costs | $4,669,000 | $4,456,000 | $5,998,000 | Contribution Margin | $3,914,000 | $3,646,000 | $4,713,000 | Less: Fixed Costs | $3,380,000 | $3,483,000 | $5,171,000 | Net Income | $534,000 | $163,000 | $(458,000) |
Fixed costs are increased by $200,000 from greater advertising costs.
The new break-even points in units and dollars: | 2004 | 2005 | 2007 | Sales per unit | $916 | $877 | $891 | Variable cost per unit | $498 | $482 | $499 | Contribution margin per unit | $418 | $395 | $392 | Break-even in units | 8,089 | 8,827 | 13,197 | Break-even in dollars | $7,411,993 | $7,739,788 | $11,751,874 |
Break-even points in units compared to the original income statement in question 1 have increased by an average of around 500 units, resulting in an increase in break-even points in dollars. The Reeves sisters could go through or not go through with the increase in advertising. The increase in advertising costs does not directly affect profit. This is because advertising cost is a fixed cost. Fixed costs do not affect the contribution margin per unit. The
