Problem Set Merchandising for Profit
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FMM225ModuleTwoPowerPoint.pptx
Module Two:
Merchandising for a Profit
1
Recognize the importance of profit calculations in merchandising decisions
Identify the components of a profit and loss statement, including calculations of the following:
Net sales
Cost of goods sold
Gross margin
Expenses
Net profit
Objectives
Complete a profit and loss statement
Identify types of business expenses and their impact on profit
Use profit calculations to:
Make comparisons between departments and stores
Detect trends
Make changes in merchandising strategy to achieve an increase in profits
Objectives (continued)
Alteration and workroom costs
Balance sheet
Billed cost
Build/percentage change/trend
Cash discounts
Closing inventory
Contribution
Controllable expenses
Controllable margin
Cost
Cost of goods sold (COGS)/cost of merchandise sold
Customer allowance or markdown
Customer returns
Customer returns and allowances
Direct expenses
Final profit and loss statement
Key Terms
Gross margin
Gross sales
Income statement
Indirect expenses
Inward freight
Net loss
Net operating profit
Net profit
Net sales
Opening inventory
Operating expenses
Operating income
Profit and loss statement
Reductions
Retail
Sales volume
Skeletal profit and loss statement
Total cost of goods purchased
Total cost of goods sold
Total merchandise handled
Key Terms
Key Concept Formulas
Cost of Goods Sold
Total cost of goods sold $ Billed cost $ + Inward freight charges $ + Workroom cost $ - Cash discount $
Cost of goods sold $
Billed cost
Billed cost = List price – trade discounts(s)
Billed cost = # Units purchased
Key Concept Formulas
Customer Returns and Allowances
Customer returns and allowances $ Total of all refunds or credits to the customer on individual items of merchandise $ Number of units actually returned
Customer returns and allowances %
Customer returns and allowances $ Gross sales $ Customer returns and allowances % and allowances $
Key Concept Formulas
Department’s Net Sales
Department’s net sales % of total stores sales
Gross sales
Gross sales Total of all prices charged to consumers of individual items Number of units actually sold
Gross sales $
Net Cost
Net cost $ = Billed cost $ Cash discount $
Net cost $ = List price $ Trade discount(s) $ Cash discount $
Net Sales
Net Sales $ = Gross sales $ Customer returns and allowances $
Key Concept Formulas
Key Concept Formulas
Build/Percentage Change/Trend
Build/percentage change/trend = × 100
= × 100
Gross Margin
Gross margin = Net sales
Gross margin $ = Gross margin %
Gross margin % = × 100
Key Concept Formulas
Operating Expenses
Operating expenses = D
Operating expenses $ = O
Operating expenses = × 100
Net Profit
Net profit = Net sales
Net operating profit = G
Net profit $ = Net profit $
Net profit% = × 100
Use of Profit Calculations
Exchange data and compare stores to determine relative strengths and weaknesses.
Indicate the direction of the business and whether it is prosperous, struggling for survival, or bankrupt.
Provide a statement for analysis so that knowledgeable changes in management or policy can be made.
Improve the profit margin by using this analysis.
Profit Components
Retail store sells merchandise to consumers at a profit
Buyer is responsible for creating the merchandise assortment
Selecting merchandise is determined after planning and analysis of what sold in a previous time period
Need to determine what, when, where, and how much to buy and what to pay for these purchases
Cost: Amount the retailer/buyer pays for these purchases
Retail: Price stores offer merchandise for sale to the consumer
Defining the Basic Profit Factors
Net Sales: How much merchandise has been sold in dollars
Cost of Goods Sold (COGS): The amount paid for the goods sold
Gross Margin (GM): Resulting amount when COGS is subtracted from net sales
Operating Expenses: Expenses incurred in buying/selling process other than the cost of goods
Net Profit: Resulting amount when expenses are subtracted from GM
Defining the Basic Profit Factors
Gross sales: The entire dollar amount received for goods sold during a given period before any reductions are taken. Can also be though of as the total sales based on the initial or regular retail price.
Reductions:
Customer returns: When merchandise is returned and the customer receives a refund.
Customer allowance or markdown: Price reduction given to a customer.
Net sales: Sales total after all reductions have been deducted from gross sales. Amount of sales collected from the sale of merchandise that actually remains sold. More significant sales figure.
Defining the Basic Profit Factors
Cost of Goods Sold (COGS): Cost of merchandise that has been sold during a given period
Cost or purchase: Price that appears on the purchase order/invoice
Inward freight: Amount a vendor charges for transporting merchandise to the retailer
Alteration and workroom costs: Charge to a department to get merchandise ready for sale
Cash discounts: Percentage or dollar amount deducted from the invoiced cost that was negotiated between the buyer and vendor
Defining the Basic Profit Factors
Gross Margin (GM): The buyer’s measure of profitability. To maximize GM, buyers need to:
Drive sales
Negotiate the best cost price
Operating expenses:
Direct: Specific to a given department and would end if department was discontinued
Indirect: Store expenses that exist whether a department is added or discontinued
Defining the Basic Profit Factors
Gross Sales: Total initial dollars received for merchandise sold during a given period
Concept:
Gross sales $ = Total of all the initial prices charged × Number of units
to consumers on individual items actually sold
Problem:
During the week (Sunday through Saturday), a toy department sold 30 dolls (Group A) priced at $15 each; 25 dolls (Group B) priced at $25 each; and 5 dolls (Group C) priced at $30 each. What were the gross sales for the dolls for that week?
Sales
Solution (Arithmetic):
30 dolls @ $15 each = $450
25 dolls @ $25 each = $625
5 dolls @ $30 each = $150
Total gross sales = $1,225
Sales
Customers can receive the following from a retailer:
Refund of the purchase price
Reduction to the selling price
These transactions result in a cancellation of the gross sale and inventory value.
Reductions (markdowns) to the selling price are commonplace in retailing today.
Customer Returns and Allowances
Concept:
Customer returns = Total of all refunds or credits × Number of units
And allowances $ to the customer on individual actually returned
items of merchandise $
Problem:
On Saturday, the junior petite department refunded $98 for one leather jacket;
$75 each for two wool skirts; and $55 each for two knit tops. Other returns for the week amounted to $400, and the weekly total of markdowns given was $1,687. What was the dollar amount of customer returns and allowances for Saturday? For the week?
Customer Returns and Allowances
Solution (Arithmetic):
$98 x 1 leather jacket = $98
$75 x 2 wool skirts = $150
$55 x 2 knit tops = $110
Customer returns for Saturday = $358
+ Total weekly customer returns = $400
+ Total weekly customer allowances/markdowns = %1,687
Customer returns and allowances (for week) = $2,445
Customer Returns and Allowances
Customer Returns and Allowances
Concept:
Customer returns and allowances percentage Dollar sum of customer returns and allowances expressed as percentage of gross sales
Customer returns and allowances %
Problem:
Last week, the junior petite department had gross sales of $20,375. Customer returns and allowances for the week totaled $2,445. What was the combined percentage of allowances and merchandise returns for the week?
Solution (Arithmetic):
Customer Returns and Allowances = $2,445 x 100 = 12%
$20,375
Customer Returns and Allowances
Net sales are the sales totals for a given period after customer returns and allowances have been deducted from gross sales.
In retailing, operating income is known as net sales or sales volume.
Net sales are the measure of success and productivity versus the plan for a department, classification, or specific time period.
Gross margin and profit are derived from net sales.
You can calculate a department’s percent to total company/store net sales to compare to other departments.
Net Sales
Concept:
Net sales $ = Gross sales $ - Customer returns and allowances $
Problem:
A shoe department sold $65,000 worth of merchandise. Customer returns and allowances and reductions were $16,250. What were the net sales of this department?
Solution:
Net Sales = $65,000 - $16,250
Net Sales = $48,750
Net Sales
Net Sales
Concept:
Department’s net sales % of total stores sales
Problem:
The costume jewelry department had net sales of $900,000. For the same period, total store sales were $45 million. What is the costume jewelry department’s net sales percentage of the total store’s net sales?
Solution:
Dept.'s net sales % to total store 2%
Sales Versus Plan and Last Year
Key performance indicator
Compare actual sales performance for a period to the plan or last year
Buyers calculate the comparison on a regular basis
Necessary to understand if the sales are meeting the plan and enough to cover expenses and result in a profit
Called: build/percentage change/trend
Formulas:
Build/percentage change/trend = × 100
Build/percentage change/trend = × 100
Same store or comparable store sales:
Sales for a specific time period for stores open at least one year
Store openings or closings do not impact this comparison
Omni-channel (online, mobile, and internet) sales journalize in various ways from retailer to retailer
Sales per square foot:
Determined by dividing the sales figure by the square footage of selling space
Net Sales
Crucial to profitability
Buyers negotiate billed costs for products, discounts, and shipping terms
Cost of Goods Sold = Billed cost $ + Inward freight charges $ + Workroom costs $ - Cash Discounts $
Calculation of Total Cost of Goods Sold:
Billed cost: Purchase price that appears on the invoice
Total billed cost: # Units purchased x Invoice Cost
Cost of Goods Sold (COGS)
Inward freight or transportation costs
Amount a vendor may charge for delivery of merchandise
Inward freight plus billed costs is called the billed delivered cost
Alteration and workroom costs
Alteration costs apply only to merchandise sold
Workroom costs apply to all purchases; these are minimal today as merchandise is negotiated to come into the store floor ready
Cost of Goods Sold (COGS)
Cash discounts
Negotiated price concession given to a buyer by a vendor
Usually a percentage of the total billed cost
Must be converted into a dollar amount
Vendors may offer discounts for payment of an invoice within a specific time
Cost of Goods Sold (COGS)
Concept:
Total cost of = Billed costs $ + Inward freight + Workroom - Cash
Goods sold $ charges $ costs $ discounts $
Problem:
An activewear department, for the first month of the period, had billed costs of merchandise amounting to $80,000; inward freight charges of $2,000; negotiated cash discounts of 7.5%; and workroom costs of $500. Calculate the total cost of merchandise purchased.
Cost of Goods Sold (COGS)
Solution:
Billed costs = $80,000
+ Inward freight = + 2,000
Billed delivered cost = $82,000
+ Workroom costs = + 500
Gross merchandise costs = $82,500
– Cash discount (7.5% x $80,000) = – 6,000
Total cost of goods sold = $76,500
Cost of Goods Sold (COGS)
Gross Margin (GM)
Difference between the total net sales and total cost of goods sold.
Measure of profitability performance for a buyer
Must be large enough to cover expenses incurred or a loss will result
Important in both dollars and percentage. Both appear on buyer’s reports
Concepts:
Gross margin $ = Gross margin %
Gross margin % = × 100
Problem:
A department had net sales of $300,000, with the total cost of goods sold at $180,000. Determine the gross margin dollars and percentage.
Solution:
Net sales = $300,000
– Total cost of goods sold = – $180,000
Gross margin = $120,000
Gross margin % = $120,000 x 100 = 40%
$300,000
Gross Margin (GM)
Control and management of expenses are a major concern for retailers
Two types:
Direct: Exist only within a given department and cease if department is discontinued
Indirect: Will continue to exist even if the particular department is discontinued
Concept:
Operating Expenses = Direct expenses + Indirect expenses
Operating Expenses
Problem:
A children’s department has net sales of $300,000, and indirect expenses are 10% of net sales. Direct expenses are:
• Selling salaries = $24,000
• Advertising expenses = $6,000
• Buying salaries = $12,000
• Other direct expenses = $18,000
Find the total operating expenses of the department in dollars and as a percentage.
Operating Expenses
Solution:
Indirect expenses (10% x $300,000) = $30,000
Direct expenses:
Selling salaries = $24,000
Advertising expenses = $6,000
Buying salaries = $12,000
Other = $18,000
Total dollar operating expenses = $90,000
Operating expense % = $90,000 x 100% = 30%
$300,000
Operating Expenses
Also known as income statement
Summarizes the basic merchandising factors that affect profit results
Analyzed on a specific time basis (usually, quarterly, seasonally, and yearly) to determine if a profit or loss occurred within a specific business unit
If income exceeds expenses, profit results
If expenses exceeds income, a loss results
As a merchant, it’s important to understand and use the data to improve a merchandising operation
It’s the buyer’s responsibility to ensure that a profit is earned on merchandise sold during a specific period
Profit and Loss Statement
Quick method to determine a department’s profit or loss for a specific time period
Transactions are not detailed
Expressed in both dollars and percentage
All percentages are a factor of net sales
Used to compare business trends from a previous time period or to compare to industry-wide figures to improve profit
Profit can vary as one or more of the key factors (net sales, cost of goods sold, or operating expenses) of change
Skeletal Profit and Loss Statement
$ %
Net Sales 100
-COGS COGS %=COGS $ X 100
Net Sales $
=GM GM %=GM $ X 100
Net Sales $
-Operating Exp. OE %=OE $ X 100
Net Sales $
=Profit or Loss P/L %=P/L $ X 100
Net Sales $
Skeletal Profit and Loss Statements
Problem:
The juniors’ sportswear department in Store A had net sales of $160,000. The cost of goods sold was $88,000, and operating expenses were $64,000.
The juniors’ sportswear department in Store B, for the same business period, had net sales of $260,000. The cost of goods sold was $135,200, and operating expenses were $109,200. Which store earned a higher net profit percentage?
Skeletal Profit and Loss Statements
Solution:
Skeletal Profit and Loss Statements
| Store A | Store B | |||
| Net sales | $160,000 | 100% | $260,000 | 100% |
| Cost of goods sold | - 88,000 | -55% | -135,200 | -52% |
| Gross margin | $72,000 | 45% | $124,800 | 48% |
| - Operating expenses | - 64,000 | -40% | -109,200 | -42% |
| Net profit | $8,000 | 5% | $15,600 | 6% |
Concept:
Cost of goods sold $ = Cost of goods sold % x Net sales $
Gross margin $ = Gross margin % x Net sales $
Operating expenses $ = Operating expenses % x Net sales $
Net profit $ = Net profit % x Net sales $
Problem:
The junior sportswear department in Store A had net sales of $160,000. The cost of goods sold was 55%, gross margin was 45%, operating expenses were 40%, and net profit was 5%. What were the dollar amounts of each?
Skeletal Profit and Loss Statements
Solution:
Net sales = $160,000
– Cost of goods sold = – 88,000 ($160,000 x 55%)
= Gross margin = $72,000 ($160,000 x 45%)
– Operating expenses = – 64,000 ($160,000 x 40%)
=Net profit = $8,000 ($160,000 x 5%)
Skeletal Profit and Loss Statements
Show the basic profit factors in detail
Includes information pertaining to stock levels
Needed to determine the value of inventory or merchandise sold (the retail method of inventory)
Opening inventory: Retail value of merchandise in stock at the beginning of the accounting period
Closing inventory: Amount of merchandise in stock at the end of the accounting period
Total merchandise handled: Sum of merchandise at cost available for sale; opening inventory at cost added to cost of new net purchases and transportation charges
Final Profit and Loss Statements
Opening inventory at cost $100,000
+ Billed costs on new purchases + $500,000
+ Inward freight + $1,000
Total merchandise handled at cost = $601,000
‒ Closing inventory at cost - $159,000
Gross cost of goods sold = $422, 000
Final Profit and Loss Statements
Factors involved in profitability are variable and are different for different organizations
Can vary over time
To increase profit:
Increase sales
Decrease the cost of goods sold
Decrease expenses (only affects the profit, not the gross margin)
How to Increase Profits
Sales Results: Measured in dollars and against the plan/goal set. (How well did the merchandise purchased sell?)
Inventory Results: Analyzed by stock turn compared to the plan/goal set; turn is the sales for a period divided by the stock for a period
Gross Margin Results: Achieved by pricing merchandise at a profitable markup and selling it at a profitable retail price; analyzed by vendor, department, and classification
Net Operating Profit Results: Evaluated at the level determined by management with designated expenses that can be attributable to the department’s operation.
Evaluating a Buyer
