Merchandising Mathematics for Retailing [5 ed.] 0132724162, 9780132724166

Citation preview

FIFTH EDITION

Merchandising Mathematics for Retailing Cynthia R. Easterling The University of Southern Mississippi

Beth E. S. Wuest Texas State University

Ellen L. Flottman Previously Affiliated with University of North Texas

Marian H. Jernigan Previously Affiliated with Texas Woman’s University

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Photo Credits: Chapter 1: p. 2, Comstock Images/Thinkstock. Chapter 2: p. 16, Creatas/Thinkstock. Chapter 3: p. 42, Jirsak/Shutterstock. Chapter 4: p. 78, © Fancy Collection/SuperStock. Chapter 5: p. 102, Marilook/Shutterstock. Chapters 6: p. 140, Stockbyte/Thinkstock. Chapter 7: p. 172, Jupiterimages/Thinkstock. Chapter 8: p. 206, Yuri Arcurs/Shutterstock.com. Chapter 9: p. 254, Digital Vision/Thinkstock.

Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within the text.

Copyright © 2013, 2008, 2003, 1992, 1984 Pearson Education, Inc., publishing as Prentice Hall, One Lake Street, Upper Saddle River, New Jersey, 07458. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey, 07458.

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Library of Congress Cataloging-in-Publication Data Merchandising mathematics for retailing / Cynthia R. Easterling . . . [et al.].—5th ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-0-13-272416-6 ISBN-10: 0-13-272416-2 1. Retail trade—Mathematics. 2. Merchandising. I. Easterling, Cynthia R. HF5429.E18 2013 381.01’513—dc23 2011042909

10 9 8 7 6 5 4 3 2 1

ISBN 10: 0-13-272416-2 ISBN 13: 978-0-13-272416-6

contents PREFACE

ix

ACKNOWLEDGMENTS DEDICATION

1

2

xi

xiii

Basic Merchandising Mathematics | 17 Objectives 17 Key Points 17 Career Corners

Introduction | 3

Lawrence William Patterson, Target Corporation 18

Objectives 3 Key Points 3 Career Corners

Ashley Fairley, D2 Showroom

Basic Arithmetic Pretest Decimals 21

Kathleen Hayman, Barnes & Noble College Booksellers, Inc. 4

Dividing Decimals

Five “Rights” of Merchandising 6

Rounding Decimals

Merchandising by Manufacturers and Wholesalers 6

Practice Problems Exercise 2.1 24 The Unit Measure 25 Practice Problems Exercise 2.2 26 Percents 27 Basic Percentage Calculations 28 Practice Problems Exercise 2.3 29 Using Percents 30

6 7

Centralized Merchandising

8

Organization of the Merchandising Division

8

Decentralized Merchandising Organization

10

Retail Merchandising by Manufacturers

Operations Division

12

Human Resources Division Sales Promotion Division

12

Practice Problems Exercise 2.4

Finding the Base

12

14

13

31

31

32

34

Practice Problems Exercise 2.6

12

Measuring the Buyer’s Efficiency

Definitions 14 Student Activity 15 Discussion Questions

30

Practice Problems Exercise 2.5

Importance of Mathematics to Buying and Merchandising 13 Importance of Profit

23

Finding the Percent

12

22

22

Finding Percentage Amount

11

Relationship of Merchandising to Other Divisions Financial Control Division

Multiplying Decimals

Retailing and Merchandising Defined 5

The Merchandising Function

19

Adding and Subtracting Decimals 22

Annette Repasch, Stage Stores, Inc. 5

Retail Store Organization

18

35

Calculating Percent Increase or Decrease 36

Practice Problems Exercise 2.7 Definitions 38 Summary Problems 39

37

15

iii

3

GAIL BAUGH, M.A., SAN FRANCISCO STATE UNIVERSITY AND FASHION INSTITUTE OF DESIGN AND MERCHANDISING, SAN FRANCISCO CONNIE ULASEWICZ, SAN FRANCISCO STATE UNIVERSITY 74

Profitability | 43 Objectives 43 Key Points 43 Career Corners Merle Mack, Kohl’s Department Stores 44

CASE STUDY 3 CONTEMPLATING NEW DIRECTIONS AT “THE MAD HATTERAS ” HOLLY LENTZ, PH.D., WEST VIRGINIA UNIVERSITY 76

David Schwarz, The TJX Companies, Inc. 44

Relationship of Basic Factors 45 Practice Problems Exercise 3.1 49 Basic Profit Factors 50 Net Sales

Practice Problems Exercise 3.2 Cost of Merchandise Sold Operating Expenses Expense Control

50

52

Margaret Bowman, Academy Sports  Outdoors 80

54

Negotiations 80 Discounts 82 Quantity (Patronage) Discounts 82

55

Trade (Functional) Discounts

56

Human Resource Productivity

Seasonal Discounts

56 Cash Discounts

56

Units per Transaction

58

Sales per Transaction

59

Sales per Employee Hour

Cash on Delivery (COD)

59

Practice Problems Exercise 3.3

Receipt of Goods (ROG)

60

End-of-Month (EOM)

63

Sales per Square Foot

Sales per Square Foot as a Planning Measure Sales per Linear Foot of Shelf Space

Practice Problems Exercise 3.4 Inventory Productivity

64

65

65

66

Practice Problems Exercise 3.5 Definitions 67 Summary Problems 68

67

CASE STUDY 1 HOW CAN THE DEPARTMENT INCREASE PROFIT? BOBBIE MOORE, M.B.A., TEXAS STATE UNIVERSITY-SAN MARCOS 72 CASE STUDY 2 MEASURING CORPORATE SOCIAL RESPONSIBILITY THROUGH P & L STATEMENT: TENSIONS BETWEEN PROFITS AND SUSTAINABILITY FOR ONLINE VS. BRICK-AND-MORTAR STORES?

contents

86

88

88 88

Extra Dating (X-Dating)

63

84

87

Regular (Ordinary or Normal) Dating

60

82

84

Practice Problems Exercise 4.1 Dating 87

Sales per Full-Time Employee Equivalent

iv

Objectives 79 Key Points 79 Career Corner

55

Performance Measures

Space Productivity

Cost of Merchandise Sold | 79

54

Profit Performance Improvement

Selling Cost

4

Advanced Dating (As Of)

88 89

Practice Problems Exercise 4.2 89 Allowances 90 Transportation Costs 91 Factors and Back Offices 93 Negotiation for Other Services 93 Practice Problems Exercise 4.3 94 Definitions 95 Summary Problems 96 CASE STUDY 1 TO BUY OR NOT TO BUY JOSHI PREETI, M.S., UNIVERSITY OF KENTUCKY 99 CASE STUDY 2 SELECTING THE BEST VENDOR EUN JIN HWANG, PH.D., INDIANA UNIVERSITY OF PENNSYLVANIA 100 CASE STUDY 3 NEGOTIATIONS AT THE FOOTWEAR MARKET BARBARA DAVIS, M.S., THE UNIVERSITY OF ALABAMA 101

5

Markup as a Merchandising Tool | 103 Objectives 103 Key Points 103 Career Corner Kasia Romo, Charming Charlie

6

Retail Pricing for Profit | 141 Objectives 141 Key Points 141 Career Corner

104

Lauren Rodgers, Neiman-Marcus, Inc. 142

Markup Defined 104 Markup as a Percent 105

Retail Objectives and Pricing 142 Pricing Policies and Retail Image 142

Calculating Markup Percent Based on Retail 105 Calculating Markup Percent Based on Cost 106

Factors that Affect Pricing 144 Price Consciousness 145

Comparison of Markup Based on Cost with Markup Based on Retail 107

The Right Price for the Consumer

Basic Markup Calculations 107 Practice Problems Exercise 5.1 110 Markup Percent on a Group of Items 111 Practice Problems Exercise 5.2 113 Timing of Markups 114 Averaging Markups 115 Practice Problems Exercise 5.3 121 Initial Markup 123 Practice Problems Exercise 5.4 126 Cumulative Markup 128 Practice Problems Exercise 5.5 129 Maintained Markup 129 Practice Problems Exercise 5.6 131 Definitions 132 Summary Problems 133 CASE STUDY 1 HOW CAN THE BUYER DETERMINE AVERAGE COST? MARINE AGHEKYAN, PH.D., CALIFORNIA STATE UNIVERSITY AT LONG BEACH 136 CASE STUDY 2 CALCULATING INITIAL MARKUP AND AVERAGE MARKUP TAMMY ROBINSON, PH.D., AND FARRELL DOSS, PH.D., RADFORD UNIVERSITY 137 CASE STUDY 3 OPERATING A SUCCESSFUL BRIDAL BUSINESS WANDA K. CHEEK, PH.D., MISSISSIPPI STATE UNIVERSITY 138

The Right Price for the Retailer

145 145

Price Lines and Zones 146 Pricing Related to Consumer Demand 146 Establishing Prices 147 Price Changes 148 Sell-Through Markdowns

148 149

Markdowns and Vendor Negotiations

Practice Problems Exercise 6.1

151

153

Markdown Cancellation and Net Markdowns

Practice Problems Exercise 6.2

155

157

Additional Markup and Markup Cancellations 158 Discounts

159

Practice Problems Exercise 6.3 Definitions 162 Summary Problems 163

160

CASE STUDY 1 PERMANENT VS. POINT-OF-SALE MARKDOWNS JUDI TOERGE, MFA, ACADEMY OF ART UNIVERSITY 167 CASE STUDY 2 TWIST OF FATE LAREE WALTEMYER, THE ART INSTITUTE OF YORK, PENNSYLVANIA 169 CASE STUDY 3 CINDERELLA’S SHOES JAEIL LEE, PH.D., SEATTLE PACIFIC UNIVERSITY 170

contents

v

7

8

Inventory Valuation | 173 Objectives 173 Key Points 173 Career Corner

The Dollar Merchandise Plan | 207 Objectives 207 Key Points 207 Career Corner

Ashley Malfitano, J. C. Penney Company, Inc. 174

Calculation of Book Inventory 175 Total Merchandise Handled 175 Retail Deductions

176

Practice Problems Exercise 7.1 177 Calculation of Shortage 178 Practice Problems Exercise 7.2 180 Estimated Shortage 181 Practice Problems Exercise 7.3 182 Methods of Inventory Valuation 183 The Retail Method of Inventory Valuation

183

Original-Cost Method of Inventory Valuation

188

Advantages and Disadvantages of the Retail Method of Inventory (RIM) 190 Suggestions for Working RIM Problems

190

Tools of Merchandise Planning 208 The Merchandise Plan 209 Format for the Merchandise Plan 209 Planning Sales 211 Sales Curves

213

Calculating Sales

217

Practice Problems Exercise 8.1 Planning Stocks 219 Stock Turnover

218

220

Practice Problems Exercise 8.2 Weeks’ Supply Method Basic Stock Method Stock–Sales Ratio

222

224

225 227

End of the Month Stock

230

CASE STUDY 1 DEPARTMENT PRODUCTIVITY RELATED TO INCREASING INVENTORY LEVELS JEANNE HEITMEYER, PH.D., THE FLORIDA STATE UNIVERSITY 202

Practice Problems Exercise 8.3 230 Planning Markdowns 232 Planning Purchases 233 Converting Retail Value to Cost Value 234 Practice Problems Exercise 8.4 235 Preparation of the Merchandise Plan 235 Practice Problems Exercise 8.5 239 Definitions 243 Summary Problems 243

CASE STUDY 2 DOES THE ACCURACY OF PHYSICAL INVENTORY AFFECT PROFIT ESTIMATES? ANN PAULINS, PH.D., OHIO UNIVERSITY 203

CASE STUDY 1 MARKDOWN MAYHEM TAMMY KINLEY, PH.D., UNIVERSITY OF NORTH TEXAS 250

CASE STUDY 3 ANALYZING PERFORMANCE WITH RETAIL METHOD OF INVENTORY RAYMOND WIMER, PH.D., SYRACUSE UNIVERSITY 204

CASE STUDY 2 KEY SALES AND INVENTORY ANALYSIS OF A JEWELRY COMPANY GARY WOLF, M.S., FASHION INSTITUTE OF TECHNOLOGY 251

Practice Problems Exercise 7.4 193 Gross Margin Return on Inventory (GMROI) 195 Review of Cumulative and Maintained Markup 196 Practice Problems Exercise 7.5 196 Definitions 198 Summary Problems 198

vi

Samantha Dornan, Michaels Stores, Inc. 208

contents

CASE STUDY 3 SIX-MONTH MERCHANDISE (DOLLAR) PLANNING LUCY SIMPSON, M.S., THE UNIVERSITY OF TENNESSEE 252

9

Open-to-Buy and Assortment Planning | 255

Jillian Cleary, Zales Corporation 256

257

Increasing Open-to-Buy Figuring Open-to-Buy

Practice Problems Exercise 9.1 261 Assortment Planning Preparing the Assortment Plan 264 Practice Problems Exercise 9.2 266 Inventory Replenishment 267

271

CASE STUDY 1 IMPROVING PERFORMANCE IN CHILDREN’S ACCESSORIES IRENE FOSTER, PH.D., FRAMINGHAM STATE UNIVERSITY 275 CASE STUDY 2 “IT TAKES A VILLAGE” (AND MAYBE BETTER ASSORTMENT PLANNING!) ROCHELLE BRUNSON, PH.D., BAYLOR UNIVERSITY 277

Objectives 255 Key Points 255 Career Corner Open-to-Buy

Practice Problems Exercise 9.3 Definitions 272 Summary Problems 273

CASE STUDY 3 YOU, AS THE ASSISTANT BUYER! FIRST TASK: OPEN-TO-BUY CONTROL JESSICA HURST, PH.D., IOWA STATE UNIVERSITY 279

258 258

APPENDIX A REVIEW OF FRACTIONS APPENDIX B SELECTED FORMULAS

262

281 287

APPENDIX C ANSWERS TO PRACTICE PROBLEMS

291

APPENDIX D ANSWERS TO PRETEST INDEX

309

311

contents

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preface This book is designed to be used as a text in

with explicit formulas and solutions. Each topic is

Case Studies, written by professors at ­several

m erchandising mathematics course taken a ­

introduced and explained, followed by example

colleges and universities, have been added to the

by ­students majoring in retail management or

problems. Solutions for the examples are provided

end of each chapter for Chapters 3 through 9. These

­merchandising. Such courses are also a­ ppropriate

to demonstrate the mathematical principles. Many

case studies are based on the c­ ontributors’ many

for students majoring in apparel design or

problems are also illustrated with solutions on

years of experience working in retailing and t­eaching

­manufacturing, interior design, and ­marketing. The

spreadsheets. Practice problems with workspace

merchandise mathematics and are important

textbook was developed to familiarize s­tudents

are provided to help the student develop skill in

­additions to the new edition. Solutions to the case

with principles and terminology important to

learning the principles presented.

studies are provided in the ­downloadable instructor’s

understanding profitable merchandising. This ­

Answers for the practice problems are

knowledge is important in preparing students for

­provided at the back of the book to enable s­ tudents

The need to understand profit factors is

entry-level positions in retailing and for eventual

to check their own progress. At the end of each

stressed throughout the book. The material is

careers as analysts, ­allocators, buyers, merchandise

chapter, there is a summary exercise to r­einforce

­presented in nine chapters:

­managers, and upper-level executives. It is also of

learning of the entire chapter. Word problems

value to ­students seeking careers in the apparel and

­demonstrating practical situations are used.

Chapter 1, “Introduction,” defines retail

home furnishings industries and in interior design.

Answers to the summary exercises, a­ dditional

­merchandising and briefly discusses store

In addition to being used as a textbook in the

Word problems, and PowerPoint slides are

organization, emphasizing the relation-

college classroom, this workbook can be used in

­provided to the instructor through the Pearson Web

ship of the merchandising ­division to other

retail executive training programs and as a reference

site at http://pearsonhighered.com/irc.

­divisions within the store.

manual at www.pearsonhighered.com/irc.

for the practicing buyer or small-store owner. The

To access supplementary materials online,

Chapter 2, “Basic Merchandising Mathe­

fundamental principles and techniques of merchan-

instructors need to request an instructor access

matics,” provides a review of decimals

dising mathematics provided can be applied when

code. Go to www.pearsonhighered.com/irc to

solving specific retail merchandising problems.

­register for an instructor access code. Within

Chapter 3, “Profitability,” presents the major

Many students fear mathematics and have

48 hours of registering, you will receive a c­ onfirming

factors involved in a skeletal profit and

inadequate knowledge of basic arithmetic. A special

e-mail including an instructor access code. Once

loss statement and emphasizes the impor-

and percents.

feature of this book is a review of the f­undamentals

you have received your code, locate your text in the

tance of controlling expenses to maximize

of arithmetic, including percents, fractions, and

online catalog and click on the Instructor Resources

profit. Also presented are concepts that

­decimals. Because many students have not worked

button on the left side of the catalog product page.

calculate ­productivity or efficiency mea-

with basic arithmetic since junior high school, an

Select a supplement, and a login page will appear.

sures, including human resource, space,

additional review of arithmetic fundamentals is

Once you have logged in, you can access instructor

­provided in the appendix.

material for all Prentice Hall textbooks. If you have

Chapter 4, “Cost of Merchandise Sold,”

Additional questions, case studies, and

any difficulties ­accessing the site or downloading

emphasizes the importance of n­ egotiating

supplementary files can be found at the Pearson

a supplement, please contact Customer Service at

with vendors to assist in improving

Careers Resources for Students website (http://

http://247pearsoned.custhelp.com/.

the retailer’s profit margin. Also ­discussed

and inventory ­productivity.

www.pearsonhighered.com/careersresources/) by

Career Corners provide the students with

a llowances, are discounts, dating, ­

searching for the book by title or going to Browse

valuable information on a variety of careers and

­transportation costs, ­vendor services,

by Discipline and choosing Fashion and Interior

the importance of mathematics in r­etailing and

­factors, and back offices.

Design and selecting your title from those listed. Basic practical problems, which occur in everyday merchandising situations, are presented

­merchandising. These interviews with ­professionals

Chapter 5, “Markup as a Merchandising Tool,”

in the fields of retail management and merchandis-

emphasizes the importance of markup to

ing can be found at the beginning of each chapter.

profitable merchandising, explaining the

ix

calculation of initial, maintained, and

retail method of inventory valuation,

Each chapter begins with Career Corners,

cumulative markup. Also ­discussed are

gross margin, and gross margin return

interviews with professionals in the retail manage-

on inventory (GMROI).

ment and merchandising field. Also located at the

the factors as related to the timing of markups.

Chapter 8, “The Dollar Merchandise Plan,”

beginning of the chapters are objectives and key

Chapter 6, “Retail Pricing for Profit,” p­ resents

explains stock turnover, sales curves,

points to assist the student in understanding the

the factors that influence the determina-

and the steps involved in completing the

major concepts. At the end of the chapters are

six-month merchandise plan.

definitions of key terms. Case studies written by

tion of retail prices and discusses price changes, including ­markdowns, mark-

Chapter 9, “Open-to-Buy and ­Assortment

retailing and merchandising educators are located

down ­cancellations, additional markups,

Planning,” presents calculation of d­ ollar

at the end of Chapters 3 through 9. The appendices

markup ­cancellations, and discounts

and unit open-to-buy as a ­control device

at the back of the book include a review of frac-

to employees and special customers.

to see that purchasing is done according

tions, selected formulas, answers to the practice

Also, the relationship of sell-through and

to the merchandise plan. Also discussed

problems, and answers to the pretest.

­pricing is described.

is assortment planning and inventory

Chapter 7, “Inventory Valuation,” covers the calculation of book inventory, shortage,

x

preface

replenishment.

acknowledgments The authors are grateful to the many businesspeople and educators who assisted in developing the book. We wish to thank the retailers and apparel manufacturers who provided various forms and materials. Appreciation is also extended to the students in our classes throughout the years who contributed to the improvement of this book. Throughout the development of the new edition, several professionals and educators

Lucy Simpson, The University of Tennessee, Knoxville. The authors would like to thank the educators who have written the case studies for Chapters 3 through 9. With these professors’ many years of experience working in retailing and teaching merchandising mathematics, the case studies offer students expanded problems that reinforce their learning from the chapters. These professors are:

were integrally involved and made substantial contributions. Much gratitude is extended to Bobbie Moore, Texas State University, for serving as a major consult throughout the review process and for assisting with the development and design of the online supplements. The authors also appreciate the contributions of Wanda Cheek, Mississippi State University; Babs Davis, The University of Alabama; Allan Cartun, Feed Your Sole; and Denise Masters, Belk, Inc. A particular note of appreciation is extended to the reviewers for their helpful criticisms and suggestions in guiding the revision of this edition. These experienced educators included: Gary Wolf, Fashion Institute of Technology Jessica Hurst, Iowa State University Eun Jin Hwang, Indiana University of Pennsylvania Joshi Preeti, University of Kentucky Raymond Wimer, Syracuse University Tammy Kinley, University of North Texas

Jeanne Heitmeyer, The Florida State University Ann Paulins, Ohio University Raymond Wimer, Syracuse University Tammy Kinley, University of North Texas Gary Wolf, Fashion Institute of Technology Lucy Simpson, The University of Tennessee Irene Foster, Framingham State University Rochelle Brunson, Baylor University Jessica Hurst, Iowa State University The authors wish to extend special thanks to the

Bobbie Moore, Texas State University– San Marcos Gail Baugh, San Francisco State University and Fashion Institute of Design and Merchandising–San Francisco Connie Ulasewicz, San Francisco State University Holly Lentz, West Virginia University Joshi Preeti, University of Kentucky Eun Jin Hwang, Indiana University of Pennsylvania Barbara Davis, The University of Alabama Marine Aghekyan, California State University–Long Beach Tammy Robinson and Farrell Doss, Radford University Wanda K. Cheek, Mississippi State University

businesspeople who assisted with the career corners. These professionals included: Annette Repasch, Stage Stores, Inc. Kathleen Hayman, Barnes & Noble College Booksellers, Inc. Lawrence William Patterson, Target Corporation Ashley Fairley, D2 Showroom Merle Mack, Kohl’s Department Stores David Schwarz, The TJX Companies, Inc. Margaret Bowman, Academy Sports + Outdoors Kasia Romo, Charming Charlie Lauren Rodgers, Neiman Marcus, Inc. Ashley Malfitano, J. C. Penney Company, Inc. Samantha Dornan, Michaels Stores, Inc. Jillian Cleary, Zales Corporation

Judi Toerge, Academy of Art University

We would also like to thank our families and

Laree Waltemyer, The Art Institute of York,

friends for their support. Special thanks are

Pennsylvania Jaeil Lee, Seattle Pacific University

extended to Ralph Russell for his words of wisdom and encouragement.

xi

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dedication This fifth edition of Merchandising Mathematics for Retailing is presented to students and educators in memory of our two coauthors who passed away before the printing of the book. Ellen L. Flottman, Ph.D., and Marian H. Jernigan, Ph.D., through their teaching, counseling, research, and publication, each encouraged students to excel in the classroom and in professional careers. In designing and developing the content of the first four editions of Merchandising Mathematics for Retailing, Dr. Flottman and Dr. Jernigan each relied upon retail management experience in the early years of their professional careers—followed by decades in the discipline as university faculty and administrators. Each endeavored to offer their students understanding of current and relevant procedures in the retailing industry as technology advanced. Each was active in professional associations. Moreover, Dr. Flottman and Dr. Jernigan maintained knowledge of the industry through long-standing acquaintance with retailing managers and executives, leading to internships for students and employment for graduates. Dr. Flottman and Dr. Jernigan each earned the Ph.D. degree from Purdue University, West Lafayette, Indiana (although their graduate studies at Purdue were not simultaneous). Dr. Flottman retired as professor and associate dean of the School of Merchandising and Hospitality Management, University of North Texas, Denton, Texas. Dr. Jernigan retired as professor and chair of the Department of Fashion and Textiles, Texas Woman’s University, Denton, Texas. Dr. Flottman and Dr. Jernigan have made a major impact on the achievements and careers of many through their role as advisors, professors, mentors, and special friends. We especially valued their wisdom, guidance, and friendship as they encouraged us to excel. They will be greatly missed. CYNTHIA R. EASTERLING BETH E. S. WUEST

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Merchandising Mathematics for Retailing

INTRODUCTION OBJECTIVES • To define retail merchandising. • To describe retail store organization. • To understand merchandising from a corporate level and a store level. • To recognize the importance of mathematics as a merchandising tool in the achievement of profit. KEY POINTS • Merchandising includes all of the activities necessary to buy and sell merchandise at a profit. Merchandising takes place at both retail and wholesale levels. • A successful merchant is a merchant who can effectively and profitably blend the five “rights” of merchandising. The five “rights” consist of providing the right merchandise, at the right place, at the right time, in the right quantities, and at the right price. • The organization of a retail store varies according to the store’s size and type. Most stores’ organizational plans have evolved from the Mazur Plan. • Today, most buying, along with other specialized retail functions, is centralized at corporate headquarters. • Buyers are evaluated by management according to objective measurements that include sales, inventory, margin results, and, ultimately, profitability. • Achievement of profit requires knowledge of the mathematical techniques and merchandising tools that assist the merchandiser in operating a store or department.

1 3

Career Corner General Manager Kathleen Hayman

Relevance of Merchandising Mathematics

Barnes & Noble College Booksellers, Inc.

During daily activities at the campus bookstores, I am constantly using mathematical concepts. Without a thorough understanding of basic retail mathematics, I could not perform my duties of planning merchandise assortments, organizing marketing and promotional events, calculating course book stock levels, and managing payroll and productivity. While Barnes and Noble provides me with printouts, spreadsheets, and other calculated data, I must have the ability to interpret the figures and understand the numbers in order to make sure that we have a maximum return on investment in our operations. No matter what you are marketing—apparel, books, or gifts— it is important to have a thorough understanding of retail mathematical concepts and their relationships to the many activities involved in achieving a profit.

Description of Job Responsibilities As the General Manager of the Barnes and Noble College Booksellers, I currently oversee the operations and management of the university bookstores at all campuses for the University of Southern Mississippi. The bookstores specialize in selling college course materials, gifts, apparel, general books, and convenience items. I strive to operate superior customer- oriented, efficient, cost-controlled, and profitable bookstores that best serve the academic community and Barnes and Noble.

Career Path In college, my career path began as a sales assistant at McRae’s, a Mississippi-based department store. After graduating from the University of Southern Mississippi with a bachelor’s degree in fashion merchandising, I returned to McRae’s as the Visual Merchandising Manager. After working 10 years at McRae’s, I was offered a position as Buyer for all general merchandise at the University of Southern Mississippi Bookstore. I eventually became the Textbook Manager at the university and was soon promoted to the Director of College Retail Sales (including Photo Services). After working 14 years at the university’s bookstore, the retail operation was outsourced to Barnes and Noble. During the reorganization, I was offered the position of General Manager for Barnes and Noble, which operates bookstores on all three Southern Miss. campuses. Advice for Students Interested in Merchandising Careers

Kathleen Hayman/BN College, Southern Miss

4

chapter 1

The most important trait to have in the retail business is the ability to change and adapt to a variety of situations. You not only need to be flexible when it comes to your job duties and daily activities, but you also have to deal with fast-moving changes in the industry itself. For example, the whole dynamics of the bookstore markets have drastically changed in the last five years. Furthermore, when I worked in visual merchandising, I saw huge and rapid changes in fashion trends. It does not matter what product you are buying and selling, it is important for you to understand that merchandising is a fast-moving and competitive business. You must also be familiar with all of the components that play a major role in achieving a profit. Most importantly, a successful retailer exhibits a keen sense of adaptability.

Career Corner Senior Vice President, General merchandise Manager Annette Repasch Stage Stores, Inc. Description of Job Responsibilities As the Senior Vice-President and General Merchandise Manager, I currently oversee the Misses Sportswear, Special Sizes,

Dresses, Swim, Outerwear, Accessories, and Intimate Apparel divisions at Stage Stores, Inc. I report directly to the Chief Merchandising Officer, and my team consists of three Vice Presidents, Divisional Merchandise Managers, and 15 buying offices. Relevance of Merchandising Mathematics Merchandise mathematics is critical to the overall success of retail business. A merchant must clearly understand the math in order to analyze the success and failures. Career Path My career began as an executive trainee at Hess’s, where I was promoted to buyer in less than two years. Later I joined Saks Inc. before being recruited by The Limited, which offered a deeper level of product development. Then I joined QVC as the Vice President/General Merchandise Manager for Sportswear, Accessories, Shoes, and Intimates, which offered another great experience in multichannel retailing. My experience in both specialty and department stores has provided a perfect foundation for my position at Stage Stores. Advice for Students Interested in Merchandising Careers

Anette Repasch/Stage Stores Inc.

Have a clear vision of your goals and timeline for reaching them. Have the ability to challenge yourself. Think outside of the box. Analyzing last year’s history is a great tool, but it’s only a tool for your toolbox. Last year is a guide, not a given. Worry forward … you should always be thinking out the future. Be aware of your surroundings, your customer, and your external environment. Today you must be a team player for survival. Be able to move and flex your style and thoughts, and still finish the goal.

This textbook deals with the mathematical concepts used in merchandising fashion goods. Although this chapter may be a review of information discussed in another class, it provides the foundation for understanding the retail arm of the fashion industry by defining some key terms and giving a brief overview of the organization of retail stores.

Retailing and Merchandising Defined The terms retailing and merchandising are often confused, with some believing that the two terms have the same meaning. This is not the case. Retailing is the last step in the supply chain that moves goods from the producer to the final consumer. Retailing includes all the business activities or functions involved in obtaining goods from manufacturers and wholesalers and selling those goods to the final consumer. Any firm that sells a product or a service to the final consumer is a retailer. A retailer may sell goods either through a store or in a nonstore setting, such as on the Internet, through a catalog, by home personal selling, or in a vending machine. In stores, retail functions include store operations, human resources, financial control, sales promotion, and introduction

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merchandising. Merchandising is considered the “heart” of retailing. (The other functions exist to support the profitable buying and selling of goods and services.) Merchandising has been defined in a number of ways. It may be defined as the management of the buying and selling of merchandise or as the planning involved in estimating customers’ requirements and procuring merchandise for them. According to the American Marketing Association, “merchandising is a term of many varied and not generally adopted meanings. It can (1) relate to the promotional activities of manufacturers that bring about in-store displays, or (2) identify the product and product line decisions of retailers.”1 Broadly defined, merchandising includes all the activities necessary to buy and sell merchandise at a profit. These activities include (1) estimating customers’ needs and wants, (2) planning purchases, (3) buying goods and making them available when and where the customer wants them, and (4) motivating customers to buy the goods made available to them. For the purposes of this workbook, merchandising is defined as a retail function involving all of the activities of planning and control concerned with the selling of goods and services to achieve a profit for the retailer.

Five “Rights” of Merchandising Successful merchandising requires competent financial planning and control of the retailer’s merchandise. Simply put, to be successful, a merchandiser should follow a long-held marketing axiom, the five “rights” of merchandising: It is necessary to provide the right merchandise, at the right place, at the right time, in the right quantities, and at the right price. The successful merchandiser understands the five “rights” of merchandising and knows how to use the tools of merchandising to determine and satisfy consumers’ needs and wants and, therefore, achieve a profit for the retail organization.

Merchandising by Manufacturers and Wholesalers Manufacturers and wholesalers must also perform the activity of retailers—merchandising—in order to do business. All three are concerned with sales and inventory. Manufacturers produce inventory that retailers purchase and then sell to the ultimate consumer. Wholesalers purchase goods from manufacturers and sell it to industrial users and retailers. The primary goal for manufacturers, wholesalers, and retailers is to sell their wares and make a profit. In order to do this, they must identify their customers’ wants and needs. For a manufacturer, merchandising is concerned with planning, developing, and presenting product lines for identified target markets. In the fashion industry, such an activity concerns pricing, assortment planning, sizing, styling, and timing. Although this workbook is focused on the retail level of the distribution chain, many of the same mathematical concepts also apply to merchandising at the manufacturing and wholesale levels of the fashion industry.

Retail Store Organization The organization of a retail store varies according to the store’s size and type. Most retailers’ organizational plans evolved from the Mazur Plan. In 1927, Paul M. Mazur developed his four-function plan for store organization. This plan established merchandising as one of four divisions, along with financial control, store operations/ management, and sales promotion. As stores expanded in size, other divisions, such as human resources, technology, real estate, and maintenance and construction, were added to the organizational structure, as shown in Figure 1-1. 1

American Marketing Association (2011), www.ama.org.

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Stockholders CEO President Maintenance/Construction

Technology

Human Resources

Store Operations

New Store Construction

Information

Personnel

Management

Training

Delivery

Labor Relations

Receiving

Renovation

Security Finance

Marketing

Real Estate

Merchandising

Accounting

Display

Land Purchasing

Planning

Credit

Promotion

Store Expansion

Buying

Statistics

Public Relations

Expenses

Fashion Office

Product Development

FIGURE 1-1 Organizational chart for a typical retail store corporation. Source: Wet Seal, Inc.

Stores vary considerably in their organizational structures; however, all stores, both large and small, must perform the same functions. A smaller store will combine several areas together under one division, whereas a larger store will operate with a greater number of divisions, each of which is more specialized.

The Merchandising Function Recent changes in store ownership have resulted in changes in retail store organization and, thus, the buying function. Before the 1980s, retail stores were largely independently owned specialty stores and local department store chains. Buyers were usually headquartered in the flagship store—the original store location—of a department store chain. Buyers could visit the departments for which they bought merchandise and talk with sales personnel as well as customers. They could even visit store branches that frequently were located in the suburbs of a single metropolitan city. Today, the terminology “flagship store” often has a different meaning. A retailer may even have more than one flagship store when the term is used to refer to a firm’s largest units. Sometimes the flagship store refers to the prototype model for the retail firm’s newest store format. The 1980s ushered in an age of department store consolidation that altered the retail landscape. Store ownership groups expanded by purchasing independent retail stores and other ownership groups. For example, by 2005, Federated Department Stores, Inc., was the nation’s largest traditional department store retailer, operating over 1,000 stores. In 2007, Federated became Macy’s, Inc., and by 2011, the company had over 800 stores under the national store names of Macy’s and Bloomingdale’s. Today, most department stores are part of a large ownership group or chain. Because of changes in store ownership, consolidation, and size, buying has changed. Today, buyers typically have offices in a central headquarters location, far removed from any store and its selling floor. For example, the J. C. Penney Company central headquarters is in Plano, Texas, the location from which buyers procure the merchandise for all J. C. Penney stores. This type of buying is called centralized buying. Many of the other retail functions, such as strategic planning, advertising, sales, and inventory planning, also are carried out at central headquarters.

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The growth of nonstore retailing is another major change in the retail environment. Today purchases can be made at the customer’s convenience. Information provided by the Internet, catalogs, television, in-home presentations, and vending machines facilitates purchasing 24 hours a day, seven days a week. Due to the growth of electronic retailing, nonstore sales are growing faster than sales in retail stores. Centralized buyers often purchase inventory for hundreds of stores, whereas decentralized buyers purchase for only one or a few stores. Consolidation of buying efforts is one way to reduce expenses and, therefore, increase profits.

Centralized Merchandising In centralized buying organizations, merchandising functions are performed for all stores at a central location, typically the corporate headquarters. The merchandising division is responsible for selecting, purchasing, pricing, and allocating merchandise to stores. It is considered the most important retail division because all other functions are dependent on the merchandising activity. Without this division, the retailer would have no reason to exist. Due to the growth of retail chains from mergers and consolidations, buying has become more specialized. Many retailers have split buying into four separate functions: (1) buying, (2) planning, (3) distribution, and (4) product development. • Buying responsibilities include developing buying plans, selecting merchandise, establishing retail prices, placing orders and reorders, maintaining proper vendor relations, managing merchandise assortments, pricing, and working with advertising and promotional plans for the stores. • Planning involves analyzing sales histories, current market trends, and the retailer’s performance objectives in order to project sales and inventories. • Distribution concerns allocating merchandise to individual stores on the basis of the store’s planned inventory levels and sales projections. • Product development identifies product ideas for internal development. Responsibilities include establishing design specifications, sourcing the fabrics and trims, and negotiating with contractors to produce the goods. These goods come into the store bearing the store’s private label, such as Macy’s INC label or Nordstrom’s Classiques Entier. They are goods for which there is no direct price comparison because they are exclusive to the store that developed them; thus, the buyer has more leeway with markup.

Organization of the Merchandising Division The organizational hierarchies for planning and distribution typically parallel organizational hierarchies for buying. Figure 1-2 shows the merchandising division of a retail corporation with its three main divisions: merchandising, CEO VP, Merchandising General Merchandise Manager

VP, Planning

VP, Product Development

Divisional Merchandise Manager

Divisional Planner

Product Developer

Buyer

Planning Manager

Sr. Designer

Associate Buyer

Planner

Designer

Assistant Buyer

Associate Planner

Associate Designer

Distributor/Allocator

Assistant Designer

FIGURE 1-2 Organizational chart for a typical merchandising division of a retail corporation. Source: Wet Seal, Inc. 8

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FIGURE 1-3 Progression from a merchandise trainee to chief merchandise officer. Source: Stage Stores planning, and product development. Key executive positions found within a typical merchandising division include general merchandise manager, divisional merchandise manager, buyer, and fashion director. Other positions in this division are associate buyer, assistant buyer, and clerical assistant. Figure 1-3 illustrates how a merchandise trainee at Stage Stores can progress up the career ladder to become the chief merchandising officer.

GENERAL MERCHANDISE MANAGER At the head of a merchandising division is a general merchandise manager (GMM), who often carries the additional title of vice president. The GMM reports directly to the president of the company. As a member of top management, a GMM takes an active part in the formulation of the retailer’s policies. These policies develop the image of the store as perceived by its customers. In addition, the policies guide buyers in the selection of merchandise by defining merchandise classifications, price zones or ranges, brand names, and the fashion orientation of the retailer. A GMM has several other responsibilities as well. For example, the GMM helps create, establish, and interpret merchandising policies. The two main functions of a GMM are planning and control. introduction

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DIVISIONAL MERCHANDISE MANAGER As the number of departments and buyers increases, it becomes impossible for one merchandise manager to supervise all buyers and merchandising activities. Related departments are grouped into divisions, headed by divisional merchandise managers (DMMs). DMMs report directly to the general merchandise manager and are responsible for merchandising a related group of sales departments or a division. Each divisional merchandise manager supervises a group of buyers. The DMM monitors sales, inventories, and promotional activities of departments to ensure consistency among them and to maintain profit goals.

THE BUYER The buyer reports directly to the DMM. The buyer is responsible for implementing company merchandising policies, plans, and procedures within his or her department. Under the supervision of a DMM, the buyer is responsible for planning purchases and buying merchandise for the department. The specific functions of the buyer vary greatly. In a one-store firm or a small store, the buyer also may be the department manager directly responsible for supervising salespeople and arranging merchandise in the department. In many retail stores, the buyer no longer performs the duties of a department manager, but still is responsible for planning purchases and sales. Another type of buyer is the owner/manager of an independent or a mom-and-pop operation. This person or, as is sometimes the case, a husband and wife, may be responsible for the total operation of the store, as well as the buying and merchandising of the store’s goods. The successful operation of a small store or an individual department depends on the buyer. Responsibilities of the buyer include developing plans, selecting merchandise, establishing retail prices, placing orders and reorders, maintaining proper vendor relations, managing merchandise assortments, and coordinating advertising and promotion plans for the store or department.

ASSISTANTS Most large retail companies have executive training programs for people interested in the career path of a buyer. In large corporations, there are many levels of assistants. For example, the senior planner might be aided by a junior assistant planner. Reporting to and assisting the buyer may be the associate buyer, assistant buyer, and/ or clerical assistant. All assistants serve as understudies for the next higher level position. For example, buying assistants are often given the responsibility of buying one or more classifications within a department. They are “buyers in training.”

MERCHANDISING STAFF BUREAUS Large corporations may also have staff bureaus that provide specialized information of importance to the buying and merchandising of goods. Examples of these bureaus include comparison shopping, a fashion office, standards and testing (quality control), merchandise research, unit control, and a resident buying office. For example, the fashion director, in consultation with the merchandise manager, determines the fashion direction for the store and provides the merchandising staff information on colors, trends, and styles for apparel, accessories, and home furnishings.

Decentralized Merchandising Organization In decentralized buying, the buyer typically works out of the store rather than a centralized headquarters. The specific functions of the buyer in a noncorporate setting vary more than the specialized duties of a buyer in a corporate setting. In a sole proprietorship or mom-and-pop operation, the buyer is often the owner and may be responsible for the total operation of the store, as well as for the buying and merchandising of the goods. In a one-store firm or small store chain, the owner/buyer must perform all planning, buying, pricing, advertising, and inventory 10

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Stockholders Board of Trustees President/CEO Design

Production

Sales

Financial Control

Promotion

Retail Stores

Sample Making

Contacting

Accounting

Advertising

Buying

Patternmaking

Quality Control

Showroom Management

Chargebacks

Special Events

Planning

Customer Service

Public Relations

Sourcing

Warehousing & Delivery

Sales Representatives

Retailer Support

FIGURE 1-4 Organizational chart for a typical apparel manufacturing firm. Source: St. John Knits control. In addition, the owner/buyer may be responsible for the supervision of salespeople and the arrangement of merchandise in a department. The owner/buyer also may be the department manager; therefore, salespeople and stockers are directly responsible to this person. Larger stores or departments may have a head of stock who supervises the merchandise in the reserve stockroom and the transfers of merchandise between stores. The head of stock works closely with the buyer and assistant buyer to maintain the proper flow of merchandise to the stores.

Retail Merchandising by Manufacturers There is a trend among fashion manufacturers (wholesalers), particularly those bearing a popular national brand or designer label, to start their own retail divisions. For example Nike, Ralph Lauren, St. John, Levi Strauss, and Guess all have retail stores. Buyers of these manufacturer-owned stores are “buying” merchandise only from their company’s inventory. For example, St. John boutiques, located nationwide, are stocked exclusively with St. John apparel and accessories. The St. John buyer, located at the company’s corporate headquarters in Irvine, California, allocates an assortment of St. John goods for each boutique. St. John benefits by the high visibility given to St. John products. In addition, St. John store divisions experience an increase in profits from purchasing goods internally. Figure 1-4 illustrates the organization of a typical fashion-manufacturing company with a retail division. Figure 1-5 shows how one apparel-manufacturing company has divided responsibilities between buying tracks and planning tracks.

CEO President Executive VP/Senior Retail

Senior VP of Merchandising or General Merchandise Manager

Senior VP of Planning or General Merchandise Manager

Divisional Merchandise Manager

Divisional Merchandise Manager

Buyer

Planner

Associate Buyer

Associate Planner

Clerical

Clerical

FIGURE 1-5 Organizational chart for a typical retail division of an apparel-manufacturing firm. Source: St. John Knits introduction

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Relationship of Merchandising to Other Divisions The central function of retailing is carried out by the merchandising division whether the buyer is located at the store or at corporate headquarters. The merchandising division drives the other functions of the retail organization. Stated differently, the other divisions support the merchandising division. If the merchandising division is to achieve its sales goals, close cooperation with other divisions must be maintained. In larger corporations, some of these functions are performed at central headquarters, while others are performed at the stores. To carry out these functions requires at least four additional divisions.

Financial Control Division The financial control division supervises the budget. This division maintains accounting records, supervises the credit department, and keeps merchandising statistics. As head of the division, the controller or financial manager is concerned with controlling the spending activities of all divisions and managing the cash flow. The financial control division works with the merchandising division in maintaining all merchandising plans and expense budgets. The controller is responsible for preparing statistical reports that are used to guide the buying and selling activities of the merchandising division and for ensuring that budgets are maintained.

Operations Division The operations division is responsible for a variety of activities, including store maintenance and housekeeping, shipping and delivery, receiving and processing, warehousing, workrooms, asset protection/loss prevention, and customer service. The major purpose of the operations division is to provide a pleasant and safe environment in which customers may shop. Under the original Mazur Plan, the operations division also supervised the functions of personnel and training. However, as stores grew in size and store operations and management became more complex, personnel and training, or human resources, became a separate division in many stores.

Human Resources Division The human resources division is responsible for hiring and training new employees, managing employee benefits, and handling labor relations. It also provides training and services to all employees and administers employees’ job performance evaluations. The relationship of this division to every division, including merchandising, is obvious, as capable, well-trained employees are necessary for the profitable operation of any business. The human resources division is headed by the human resources director, who is aided by a staff that may include a training director, an executive recruiter, and an executive development head.

Sales Promotion Division The sales promotion division, headed by the promotion director or marketing director, is concerned with advertising, visual merchandising, and public relations. It is responsible for all forms of advertising, such as newspaper, television, radio advertisements, ads in magazines, and direct-mail advertising. The sales promotion division handles window and interior displays, architectural and interior design of new stores, 12

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store remodeling, and the presentation of merchandise. Visual merchandising develops signage, displays, promotional materials, floor plans, fixtures, and merchandise presentation standards. The sales promotion division also oversees the store’s public relations program, which plans publicity events such as fashion shows, parades, and store special events. The primary purposes of sales promotion are (1) to communicate information about the store and its merchandise to both current and potential customers and (2) to bring customers into the store and instill in them a desire to buy. All areas of sales promotion are important in assisting with the development of the image of the store as perceived by the customer. Sales promotion works closely with the merchandising division to promote the merchandise selected by the store’s buyers. Because the buyer is the one who best knows the customers’ preferences, he or she is responsible for selecting merchandise to be promoted and for communicating the important facts about the merchandise to the advertising department. The buyer is usually responsible for checking advertising proofs and ensuring that advertisements are truthful and accurate.

Importance of Mathematics to Buying and Merchandising Merchandising is a highly competitive business, especially when fashion goods are involved. Fashion merchandise is found throughout the department store. Fashion influences not only the clothing we wear but also every aspect of our lives. Fashion affects how we decorate our homes, the way in which we entertain, and how we spend our leisure time. Fashion has brought color and design to bed and bath linens, as well as to home furnishings, housewares, and home electronics. In fact, many well-known designers have introduced home-furnishing linens in their product offerings. For example, the Ralph Lauren name appears on linens, home accessories, furniture, and even paint! Currently, most products are available in an assortment of styles and colors. Fashion has greatly increased the variety of goods available and, in effect, made the merchandiser’s job more complicated. Competition in retailing has become keen, with many retailers vying for the consumer’s business. Because of the competitive nature of retailing, merchandisers must compete effectively to realize their profit goals. An understanding of buying practices and techniques is necessary to secure the maximum return on investment. Sales volume is influenced by the cost of merchandise, expenses of doing business, competition, and profit goals. The merchandiser needs to understand the interrelationships among all factors that influence the buying and selling of merchandise. The buyer needs to be able to plan adequately in order to achieve preestablished sales and profit goals.

Measuring the Buyer’s Efficiency It is important that buyers be efficient in performing their stated duties. If not, the company could suffer losses in profits and in customers. Therefore, it is essential that management use objective measurements in evaluating a buyer’s efficiency. These objective measurements are broken into three categories: sales, inventory, and margin results. 1. Sales: A buyer’s sales figures are constantly being compared with established goals and last year’s figures. For example, • Sales goals are set for the current year, and the buyer is expected to achieve or even surpass those goals. Sales can be measured readily in units and/or dollars. • Sales per square foot of selling space are also considered in evaluating effectiveness. The successful buyer seeks to increase dollar sales per square foot. introduction

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• The percentage increase or decrease in sales can be calculated on the basis of the previous year’s figures. A sales increase is an indicator of the buyer’s success. • Sales figures can be compared with the figures for similar departments in other stores. Government agencies and trade associations provide comparative data. Also, chain stores and those owned by large ownership groups, such as Macy’s, Inc., or Saks, Inc., compare different stores under their ownership. 2. Inventory: Inventory results provide the second measure of the buyer’s efficiency. Inventory results include stock turnover, the proportion of old stock still in inventory, and the ratio of stock shortage to sales. 3. Margin: The third measurement of the buyer’s efficiency is margin results, which include the initial markup, maintained markup, gross margin, operating profit, and gross margin return on inventory. Buyers need to understand the meaning of each of these figures and should be able to evaluate their own performance at any given time.

Importance of Profit Ultimately, the most important part of a buyer’s job is to make a profit for the retailer. The buyer’s job is highly accountable, and the buyer needs to understand the mathematics of managing a department in order to achieve a profit. Buying in retail stores is highly quantitative, with computers making available a wealth of data that may be used in managing the business and planning purchases. Successful buying and merchandising demands an understanding of profitability. Achieving a profit requires knowledge of mathematical techniques and merchandising tools that assist in operating a department. The mathematics of merchandising involves simple arithmetic. It is not necessary to be a mathematician to understand the principles of merchandising. You do not need to know algebra or trigonometry. Knowledge of the common operations of addition, subtraction, division, and multiplication, together with an understanding of percents, fractions, and decimals, is the basis for merchandise mathematics.

Definitions Definitions

Centralized Buyer – Buyer who is located at, and purchases inventory from, a centralized location such as central headquarters or a regional office.

Centralized Buying – The concentration of the responsibility for selecting and purchasing merchandise for a chain or group of stores in the hands of the headquarters staff rather than in the individual stores. Controller – Executive who is responsible for preparing statistical reports that are used to guide the buying and selling activities of the merchandising division and for ensuring that budgets are maintained. Decentralized Buyer – Buyer who is located in a retail store and who purchases inventory for that store and its branches from his or her location in the store. Divisional Merchandise Manager (DMM) – Retail executive who supervises a group of buyers and is responsible for the merchandising activities of a related group of sales departments or divisions.

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Five “Rights” of Merchandising – An axiom of merchandising that states that the successful merchandiser must have the right merchandise, at the right place, at the right time, in the right quantities, and at the right price. Flagship Store – The main store of a large retailing firm having a number of stores. Traditionally, the flagship store was the original downtown store. Today, the term often is used to denote a company’s largest stores that frequently serve as prototypes providing the model for the ideal store format. General Merchandise Manager (GMM) – Retail executive who is responsible for supervising a group of divisional merchandise managers and for interpreting and executing store policies. Mazur Plan – Four-function plan for store organization that establishes merchandising as one of four divisions, along with financial control, store operation/management, and sales promotion.

Merchandising – The management of the buying and selling of merchandise, or the planning and control involved in marketing particular merchandise, at places, times, prices, and quantities that will best serve to realize a profit. Product Development – The process of originating a product idea, sourcing the fabrics and trims, and negotiating for a contractor to produce the goods.

Private Label – Goods developed by a retailer to be sold exclusively in that particular company’s stores and which carry the retailer’s label. Retailing – All of the functions involved in obtaining goods and selling them to the final consumer.

Student Activity Student Activity

Select a retailer you are interested in and obtain a copy of its organizational chart(s).

1. How does it differ from the basic Mazur Plan?

2. What job titles are used in the merchandising division? 3. Are buying, planning, distribution, and product development separate activities within the merchandising function?

Questions

Chapter 1 • Discussion Questions 1. What are the primary functions of retailing?

2. Merchandising includes all of the activities necessary to buy and sell merchandise at a profit. What are these activities?

3. What are the five “rights” of merchandising? 4. What is the primary goal of both manufacturing and retailing? 5. What were the original divisions in the Mazur Plan for store organization?

6. As stores have expanded in number and size, what divisions have been added to the organizational structure?

7. How do small stores and large stores differ in organizational structure?

8. What is the title of the executive who heads the merchandising division in a department store?

9. Describe the organizational structure of the merchandising division of a retail-store corporation and the retail division of an apparel-manufacturing company.

10. Name the major responsibilities of each of the following department store personnel: GMM, DMM, and buyer.

11. What merchandising staff bureaus might be found in large department stores?

12. What are the primary activities of a retail merchandising division? 13. What is the relationship of each store division to the merchandising division?

14. What objective measurements does management use to evaluate store buyers?

15. Why is mathematical ability important in merchandising? 16. Explain the differences between centralized and decentralized buying.

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BASIC MERCHANDISING MATHEMATICS OBJECTIVES • To understand basic mathematical calculations frequently used in making decisions related to merchandising and management activities. • To sharpen skills and improve speed and accuracy in using mathematics. • To review the use of decimals and percents. • To develop competency in applying basic mathematical formulas to solve merchandising problems. • To understand and use unit measures. KEY POINTS • A basic knowledge of mathematics is essential to conducting successful merchandising activities and operations. The understanding of fractions, decimals, and percents is essential to conducting daily business functions. • Every merchant in every store, no matter how large or small, should be familiar with basic mathematics. • It is important to master basic merchandising mathematics in order to make effective merchandising decisions.

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Career Corner Executive Team Leader, Soft lines and Guest Experience Lawrence William Patterson Target Corporation Description of Job Responsibilities My core roles as an Executive Team Leader for Soft Lines and Guest Experience with Target include impacting quality and productivity by directing/ overseeing merchandise, operational, and human resources functions at the store. I help manage the store team to maximize profits, drive sales, and improve guest experience, and more importantly help team members grow and succeed through strong leadership and Lawrence W. Patterson/ Target Corporation accountability. Daily training and education is extremely important to the success of any retail environment! Relevance of Merchandising Mathematics Mathematics and retail merchandising go hand in hand. Many individuals, including myself, have no idea how relevant mathematics is to merchandising at the start of their career. Currently in my role with Target, mathematics is used daily: ordering supplies, ensuring rack and fixture placement impacts margins, identifying what areas within the store generate the greatest return on investment (ROI), and determining how much product should be ordered to maintain brand standards. Personally, I feel understanding mathematics is extremely important, and there is no question about its relevance. Career Path While earning my bachelor’s degree in Management Information Systems at Oklahoma State University, I began the Management

Internship with Buckle in my junior year. I loved working for Buckle because of the freedom and responsibility; it was the closest thing to running my own business without assuming all the risk. Buckle was unique in that it paid its managers from the net profits of their operation, a structure that fed into my driven and aggressive personality. For that reason, I was quickly promoted from a manager to an area manager and recruiter, each year assuming more stores and more colleges. With my knowledge and expertise in recruiting, salesmanship, and merchandising, I helped cultivate and mold strong leaders who assisted in generating bottom-line, profitable results. As a recruiter, I built lasting relationships with students and faculty on college campuses through campus recruiting events, monthly classroom presentations, and hosting student workshops. After 10 years of traveling and working 55/60+ hours a week, Target’s opportunity to attend three to nine career fairs a year and network with other professionals sounded very appealing. Target’s slogan “Fast, Fun, and Friendly Always” and commitment to family and work-life balance were obvious with their management teams. With Buckle being a smaller specialty retail chain and Target considered a big box retailer, many things are similar while others are very different! At Target, I still utilize all my strengths within the retail environment but with more structure and balance. I close the store one night a week and have every other weekend off; in retail that type of schedule is not common! Advice for Students Interested in Merchandising Careers First I would say, LOVE PEOPLE! Next, be open-minded in all aspects. Fashion merchandising is not black and white; it has different shades of all colors not just gray! Network and learn as much as you can about different companies and positions within merchandising and fashion. A career in merchandising can be the most challenging and rewarding experience one could ever have! A career in fashion merchandising was the best decision I ever made! If you are smart, creative, love people, enjoy leading others, and seek challenges, you may want to look into a career in merchandising.

Career Corner Showroom Manager Ashley Fairley D2 Showroom Description of Job Responsibilities As the Showroom Manager of D2 Showroom, a wholesaling firm, I oversee six office associates, as well as two road representatives. I manage the day-to-day job duties, such as customer service, e-mail marketing, Web site design and updates, Ashley Fairley/D2 Showroom

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establishing the time frame for appointments, and generating end-of-day sales reports. In addition, I am always analyzing the business as a whole. I monitor sales numbers, new account approvals (about 30 new applicants a week), manage product distribution, and scout for new lines at shows. I manage all markets, all travel accommodations, hire interns, manage market day assistance, attend career days, and report everything to the owner at the end of each day. Relevance of Merchandising Mathematics I use merchandise mathematics on a daily basis to analyze our business. D2 represents 13 different clothing lines for which

I compare sales trends to the last year (for example, sales are we up for spring but down for summer?). I also analyze sales by month and by week and go over the results with the owner of the showroom. Together, we make decisions based on this information and ask ourselves questions such as these: Should we pick it up a notch on the road? Are we marketing the line correctly? Should we increase our e-mail blasts? Is this line right for us?

throughout our territory to all the boutiques writing orders. I was then promoted as a Showroom Manager. My next career progression could include opening my own showroom or becoming a National Sales Manager at the corporate level.

Career Path

It is so important to work in retail and to get a foot in the door to a trade show. You meet with other retailers; you meet with wholesalers, designers, and merchandisers; and you basically meet everybody you would need to know to start networking at a trade show.

While earning my degree in Marketing at the University of New Orleans, I worked at the regional and national fashion markets and in retail. After graduation I started as road representative for four clothing companies, traveling

Advice for Students Interested in Merchandising Careers

Merchandisers constantly make decisions that require a thorough understanding of retail mathematics. To be a successful merchandiser, you must both understand this math and be proficient at it. Performing calculations with speed and accuracy is essential to operating a successful retail, wholesale, or manufacturing business. To operate a profitable business, you must be able to work effectively with numbers and to visualize numbers quickly. Although calculators and computers will help you to do your work, they are only tools and must be told what to do by people. Some believe that an understanding of mathematics is not important in the computer age. However, nothing could be further from the truth: To understand what the computer is doing, you must first understand basic mathematics. The computer is only a tool to help people do their work. Although computers provide you with information, you need to know what that information means and what to do with it. You also need to be able to perform mathematical calculations when you do not have a calculator or computer available to do it for you. The mathematics of merchandising involves simple arithmetic, such as addition, subtraction, multiplication, and division. Although you may be familiar with these concepts, a good review of basic arithmetic is important to help sharpen your skills and to improve the handling of calculations with speed and accuracy. Understanding how to use fractions, decimals, and percents is essential to achieving success in merchandising. It is important to master these basic mathematical concepts and to be able to apply mathematical formulas to solving all types of merchandising problems. This chapter will help you improve basic mathematical skills that will enable you to make effective merchandising decisions. It is essential that you build confidence and work with accuracy in order to avoid simple mistakes, which can be very costly to a business. The pretest that follows can serve as a guide to identify your strengths and weaknesses in basic merchandising mathematics. Work as rapidly as you can, but do not work so fast that you readily make mistakes. Let the pretest guide you in determining where you need review. If you find that you need review, see Appendix A for additional explanations and practice problems. Observe these three rules as you complete the Basic Arithmetic Pretest: 1. When figures are given in dollar-and-cent amounts, use a dollar sign ($) with your final answer. 2. Round your final answer to the nearest hundredth (cent). Do not round until you have the final answer. 3. Use a comma to divide thousands.

Basic Arithmetic Pretest 1. Add: (a)

570 +225

(b)

$102.59 3.49 + 10.99

(c) $499.99 1,489.50 23.03 + 405.99

(d) $19.99 29.99 + 49.99 Basic Merchandising Mathematics

19

2. A customer bought the following items: 2 towels at $14.99 each 4 washcloths at $3.89 each 6 washcloths at $2.25 each 2 beach towels at $28.49 each What was the total amount purchased?

3. Subtract: (a) $11.99 - 0.19

(b) $349.55 - 219.99

(c) $5,450.00 - 325.05

4. A buyer for the men’s department purchased 34 dress shirts costing $29.50 each. If 8 of the shirts were damaged and returned to the vendor, what was the total bill for the shirts kept by the buyer?

5. Multiply: (a) $425.50 * 0.325

(b) $4,444.49 * 10.50

6. Divide: (a) 145.48 , 1.2

(b) 299.50 , 0.50

7. What was the total cost for a customer who purchased 4 tops at $28.98 each, with a sales tax of 8.5%?

8. Last week a salesperson worked 28 hours and had total sales of $2,170. Find the average sales per hour.

9. Solve the following problems: (a) 25% of $200 = _____________ (b) 50 = ____________% of $5,500 20

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(c) $12.50 = 50% of _____________ (d) 15 1>2 % of $45 = _____________

10. A customer selected a dress marked $89.99 and received a 15% discount. What was the price of the dress after the discount?

11. Calculate the average monthly sales for a salesperson in the children’s department who made the following sales: June

$4,350.50

July

$2,200.00

August

$3,509.99

12. A woman purchased 8 1/4 yards of lace at $25.49 a yard. What was the total that she paid with a 6% sales tax?

13. A hosiery department had a sale on pantyhose at three pairs for $12. How much would four pairs cost?

14. What is the total cost of the following purchase order? 45 130 32

plates at $10.50 each glasses at $21 a dozen cups at $30 a dozen

Decimals Decimals are used to indicate fractions of tenths, hundredths, thousandths, or some other multiple of 10. For example, 1.3 indicates one and three-tenths; the number 1.35 means one and thirty-five one-hundredths. Decimals are used in statements of dollars and cents. The amount $4.25 indicates four dollars plus twenty-five one-hundredths of a dollar. In working with decimals, always remember that any number of zeros may be added to the right of the decimal point without changing the value of the number. For example, $4 is the same as $4.00, and $4.25 is the same as $4.2500. When using a calculator, you only need to enter decimals correctly; the calculator will do the rest. Be certain that your calculator displays at least three numbers to the right of the decimal.

Basic Merchandising Mathematics

21

Adding and Subtracting Decimals Adding and subtracting numbers with decimal points is similar to working with whole numbers; however, all of the decimal points must be aligned in the same column. When a whole number is written without a decimal point, it is understood that the decimal point is located to the right of the whole number. For example, 125 is the same as 125.0. In adding and subtracting decimals, any number of zeros may be added to the right of the decimal point to line up the numbers correctly.

Example 2-1 255.25 255.250 125 125.000 + 75.321 or + 75.321 455.571 455.571

630.000 630 25.255 - 25.255 or 604.745 604.745

Multiplying Decimals The rules for multiplying decimal numbers are the same as those for multiplying whole numbers, except for determining the location of the decimal point in the answer. (The answer is known as the product.) To locate the position of the decimal point in the answer, add the number of decimal places in the numbers to be multiplied. This sum will give you the number of places to count off in the answer. Begin at the right and count off the number of decimal places.

Example 2-2 2.35 * 2.1 235 470 4.935

There are two decimal places in 2.35 and one decimal place in 2.l; therefore, three decimal places (2 + 1) should be counted off in the answer.

Dividing Decimals In dividing decimal numbers with a calculator, the decimal will be positioned automatically in the answer. To divide with a calculator, enter the dividend first, then the divisor.

Example 2-3 48.24 , 12 This problem can be expressed verbally in two different ways: 48.24 divided by 12 or 12 divided into 48.24. The two expressions mean the same thing. Without a calculator, the problem would be set up as 12冄 48.24 The decimal point in the answer (known as the quotient) would be directly above the decimal point in the dividend.

divisor

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4.02 h quotient v 12冄 48.24 h dividend

It is important to understand the basic principles of dividing decimal numbers and to be able to divide without using a calculator; one may not always be available. When the divisor is a whole number, proceed as with regular division. The decimal point in the quotient (the answer) is always directly above the decimal point in the dividend. If the divisor is a decimal number, it must first be changed to a whole number. This change is made by moving the decimal point to the right; the decimal in the dividend must also be moved to the right the same number of places. This operation actually multiplies the divisor and the dividend by the same number, which does not affect the value of the numbers. For each position the decimal point is moved to the right, the value is multiplied by 10. Perform division as usual, making sure to position the decimal point in the quotient directly above the one in the dividend.

Example 2-4 48.486 , 0.12 Since the divisor contains two decimal places, move the decimal point in the divisor and in the dividend two places to the right. 404.05 0.12冄 48.486 = 12.冄 4,848.6 = 12冄 4848.60 If the dividend is a whole number, add zeros where necessary when moving the decimal.

Example 2-5 300 , 0.5 600. 0.5冄 300.0 = 5冄 3,000 = 5冄 3,000.

Rounding Decimals Rules for rounding decimals differ, depending on the degree of accuracy desired and the particular purpose of the figures. For example, if men’s pants were priced at two pairs for $45.95 and a customer wanted only one pair, you would charge $22.98. The amount would be rounded up to the nearest cent, which is the nearest hundredth. In some situations, the accountant must be more accurate with figures and may need to round off to the nearest thousandth, ten-thousandth, and so forth. Retailers usually round numbers off to the nearest hundredth.

Rule: When working problems in this workbook, round all final answers to the nearest hundredth (two decimal places) unless instructed otherwise.

That is, carry out figures three positions to the right of the decimal point, and round to two decimal places. When rounding off a number, check the number in the third position to the right of the decimal point and then round to two places. If the number in the third place is 5 or more, drop this number and add one to the number to its left. If the number in the third place is less than 5, drop this number and leave the others as they are.

Basic Merchandising Mathematics

23

Example 2-6 45.678 is rounded to 45.68 45.674 is rounded to 45.67 45.675 is rounded to 45.68 78.998 is rounded to 79.00 119.965 is rounded to 119.97 119.998 is rounded to 120.00

Practice Problems • Exercise 2.1 Do not round answers except when directed to round. 1. Add the following numbers: (a) 5.21 + 77.6 + 50 = ________ (b) 25 + 3.333 + 7.67 + 0.8 + 135.1 = _________ (c) 455.67 + 330.995 + 0.55 + 0.3 + 88 = _________ (d) $550.05 + $63.75 + $89 = _________

2. Subtract the following numbers: (a) 550 - 25.733 = _________ (b) 0.88 - 0.13495 = ________ (c) 55.721 - 0.3 = __________ (d) $87 - $1.35 = __________

3. Multiply the following numbers (round answers to the nearest cent): (a)

$14.25 * 4

(b) $50.25 * 3.5

(c) $16.35 * 0.3

(d)

0.653 * 1.2

4. Multiply the following numbers (round answers to the nearest cent): (a) $625.35 * 3.1 = _________ (b) $4,560.21 * 21.7 = _________ (c) $2,868.79 * 68.300 = _________ (d) $6,777.75 * 0.12 = _________

5. Divide (round answers to the nearest hundredth): (a) 5冄 35.5 24

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(b) 5.5冄 75.555

(c) 2.164冄 1,350.2

(d) 10.64冄 283

6. Divide (round answers to the nearest hundredth): (a) $35,000.69 , 9 = _________ (b) 5,635.02 , 5.5 = _________ (c) $2,351.12 , 0.125 = _________ (d) $1,520 , 0.26 = _________

7. Round the following numbers to two decimal places: (a) 405.333 = _________

(f) 49.995 = _________

(b) 21.357 = _________

(g) 0.996 = _________

(c) $21,544.897 = _________

(h) 597.895 = _________

(d) 42,896.563 = _________

(i) 10.366 = _________

(e) 0.095 = _________

(j) 534.009 = _________

The Unit Measure A unit measure is used in buying certain categories of merchandise, such as toiletries, cosmetics, underwear, and glassware. These items are often sold in dozens or fractions of a dozen. Furthermore, in the apparel industry, unit measures are used in purchasing the findings and trimmings that complete a garment. Findings include such small functional items as buttons, hooks, snaps, zippers, and shoulder pads. Trimmings include decorative items such as ribbons, braids, and lace. Common unit measures are • 2 units = 1 pair • 12 units = 1 dozen • 144 units = 12 dozen = 1 gross It is important to understand fractional parts of a dozen, since many items are ordered by the dozen or fractional parts thereof, such as 2>3 dozen, 13>4 dozen, or 3 5>6 dozen. To find a fractional part of a dozen, such as 1/3 dozen, multiply by 12 (number in a dozen).

Example 2-7 2> 3

* 12 = 2>3 *

3 5>6 * 12 =

23>

6

13>4 * 12 = 7>4 *

12> 1

*

=

24>

3

12> 1

=

276> 6

12> 1

=

84> 4

=8 = 46

= 21

In working with fractional parts of a dozen, it is critical to round the quantity to a whole number. For example, 3 5/6

dozen is rounded to 46 units; it cannot be used as 45.96 ( 3.83 * 12 = 45.96 ) . The number must be

rounded to a whole number. An order of 3 5>6 dozen blouses is for 46 units, and 46, rather than 45.96, must be used in calculating the cost and retail value of this merchandise. The following equivalents are frequently used in retail merchandising: • 1 dozen = 12 •

1

> 3 dozen = 1 > 3 *

12

>1 =

12

>3 = 4

Basic Merchandising Mathematics

25

•

2

> 3 dozen = 2 > 3 *

12

>1 =

24

>3 = 8

•

1

> 4 dozen = 1 > 4 *

12

>1 =

12

>4 = 3

•

3

> 4 dozen = 3 > 4 *

12

>1 =

36

>4 = 9

•

1

> 6 dozen = 1 > 6 *

12

>1 =

12

>6 = 2

Practice Problems • Exercise 2.2 1. A buyer for children’s wear received an order of designer jeans. He decided to keep 14 1>4 dozen pairs of jeans at the main store and send 4 1>2 dozen pairs to the branch store. How many pairs of jeans (units) were purchased?

2. The buyer in men’s furnishings ordered the following quantities of ties: 8 2>3 dozen, 15 1>6 dozen, 9 3>4 dozen, and 3 1>2 dozen. How many ties were ordered? (Give your answer in units.)

3. How many pairs of shoulder pads are there in (a) 5 dozen? (b) 12 dozen?

4. Express 2 1>2 gross buttons in (a) dozens and (b) units.

5. How many dozen machine needles are there in a package of 156?

6. If 25 dozen buttons are on hand, how many garments can be completed if each garment requires 9 buttons?

7. Convert these dozen quantities into their unit equivalents: (a) 5 1 > 4 dozen = _______

(f) 7 1 > 2 dozen = _______

(b) 2 1 > 3 dozen = _______

(g) 11 2 > 3 dozen = _______

(c) 10 1 > 6 dozen = _______

(h) 18 1 > 4 dozen = _______

(d) 21 > 6 dozen = _______

(i) 3 2 > 3 dozen = _______

(e) 1 3 > 4 dozen = _______

(j) 22 3 > 4 dozen = _______

5

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Percents Percents are one of the most commonly used mathematical concepts in merchandising. Many merchandising calculations are expressed in both percent and dollar amounts. Percents are often more meaningful than ­dollar amounts because they can be compared. Using percents, a division or department can compare itself with ­similar divisions or departments in its own company and with departments in other companies, or can compare its current performance with its performance during a previous season or year. Throughout this workbook, you will find that you will need to figure a percent. Percents are used to answer some of the following questions: • What is the markup percent on merchandise? • What is the markdown percent on merchandise? • What is the percent gain or loss in sales over last year? • What is the ratio (percent) of an individual unit’s sales to a total company’s sales? • What percent profit did a department or a firm achieve? • What percent of sales was spent on advertising and promotion? • What is a company’s share of the market? Percents are also used in figuring discounts, taxes, and commissions. The percent of a number can be easily determined using the % key on a calculator; however, it is important that you understand the meaning of percents and know how to figure a percent when a calculator is not available. A percent is a part of a whole, expressed in hundredths. Therefore, 90% equals ninety hundredths, or 90/100, and 20% equals twenty hundredths, or 20/100. A percent may be expressed as a fraction or a decimal.

Example 2-8 47% = 47/100 = 0.47 50% = 50/100 = 1>2 = 0.50

Figuring a percent is easy when you are working with units of 100. It is just as easy with other numbers if you realize that a percent is merely the relationship of one number to the whole.

Example 2-9 If you received a shipment of 80 blouses and sold 60 at full price, the relationship would be 60 to 80. The percent of blouses sold at full price would be determined by dividing the number of sold into the total. 60/80 = 0.75 = 75%

Example 2-10 If a buyer ordered 40 dresses, of which 5 were size 14, the percent of size-14 dresses would be determined by dividing 5 by 40. 5/40 = 0.125 = 12.5%

In working problems without a calculator, a percent must be converted to a fraction or a decimal. The following examples show percents written in various forms:



Basic Merchandising Mathematics 27

Example 2-11 50% = 1>2 = 0.50 or 20% = 1>5 = 0.20

Basic Percentage Calculations Review the calculations that follow. You should be comfortable with converting a percent to a decimal to a fraction in any order. 1. Percent to a Fraction—To convert a percent to a fraction, drop the percent sign and divide by 100. Reduce if possible.

Example 2-12 20% = 20/100 = 1/5

2. Percent to a Decimal—To convert a percent to a decimal, move the decimal point two places to the left (thereby dividing by 100) and drop the percent sign. Zeros may be added to complete the procedure of moving the decimal.

Example 2-13 5% = 0.05 35% = 0.35

In working with a fractional percent, first convert the fraction into its decimal form and then proceed in accordance with the preceding rule. Add zeros when needed.

Example 2-14 4 1>2% = 4.5% = 0.045 12 3>4 % = 12.75% = 0.1275

3. Decimal to a Percent—To convert a decimal to a percent, move the decimal point two places to the right (thereby multiplying by 100) and add a percent sign.

Example 2-15 0.75 = 75%

4. Fraction to a Percent—To convert a fraction to a percent, change the fraction to a decimal (that is, divide the denominator into the numerator) and then convert to a percent.

Example 2-16 1>

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4

= 1 , 4 = 0.25 = 25%

Practice Problems • Exercise 2.3 1. Change the following percents to fractions and reduce to lowest terms: (a) 25% =_________

(f) 35 3>4 % = _______

(b) 1>4 % = ________

(g) 0.8% = ________

(c) 0.2% =_________

(h) 85% = _______

(d) 45 1>2 % = _______

(i) 95% = _______

(e) 0.5% = _________

(j) 168.75% = _________

2. Convert the following percents to decimals (do not round answers): (a) 12 1>2 % = _________

(f) 8% __________

(b) 200% =__________

(g) 145% =________

(c) 60% =__________

(h) 100% =_________

(d)

88 1>4 %

= _________

(e) 154.8% =__________

(i) 5% =__________ (j) 0.58% =_________

3. Change the following decimals to percents (do not round answers): (a) 0.02 = ______________

(f) 1.25 = ______________

(b) 0.125 = ______________

(g) 0.335 = ______________

(c) 0.5 = ______________

(h) 2.65 = ______________

(d) 1.5 = ______________

(i) 0.04 = ______________

(e) 10.86 = ______________

(j) 1.7965 = ______________

4. Change the following fractions to decimals (round answers to nearest thousandth): (a)

1> 4

(b)

1 1>5

= ______________

(c)

2> 5

= ______________

= ______________

(d) 2 5>8 = ______________

(e)

3> = ______________ 4

(f)

2> = ______________ 3

(g) 5>8 = ______________ (h)

1>

10 = ______________

5. Change the following fractions to percents (round answers to the nearest hundredth): (a)

1> = _______________ 2

(e)

2> = ________________ 5

(b)

1> = ________________ 3

(f)

3> = ________________ 4

(c)

1> = ________________ 6

(g) 1 2>3 = ________________

(d) 1>8 = ________________

(h)

3> = ________________ 8

Basic Merchandising Mathematics

29

Using Percents Any problem involving a percent has three major components: percentage amount, percent, and base. The percentage amount is the fractional amount, the percent is the rate, and the base is the total amount. The following example illustrates the three major parts of a percentage problem:

Example 2-17 As a salesperson in the children’s department, Jane will receive a 10% commission on all sales that she makes. During August, she sold $1,500.00 worth of goods. Her commission for that month was $150.00. Following are the three parts of this percentage problem: Base

= $1,500

Percent

= 10% or 0.10 in decimal form

Percentage amount = $150 (commission made)

Finding Percentage Amount To find the percentage amount, change the percent (rate) to a decimal and multiply by the base. Percentage Amount ⴝ Percent : Base

Example 2-18 Find 12% of $400. 12% = 0.12 Percentage Amount = Percent * Base = 0.12 * $400 = $48

Example 2-19 A buyer for women’s sportswear purchased 150 skirts from a manufacturer. Of the group of skirts, 20% were wraparound styles. How many were wraparounds? 20% = 0.20 Percentage Amount = Percent * Base = 0.20 * 150 = 30 In using a calculator with a percent key, it is not necessary to convert the percent (rate) to its decimal form, as shown in the previous example. The percent key automatically makes the conversion. Most calculators are programmed so that the base number, rather than the percent (rate), must be entered first. Check your calculator to see whether the base number must be entered first.

30

chapter 2

Practice Problems • Exercise 2.4 1. (a) 1>2% of $716 = __________ (b) 107% of $385 = ___________ (c) 3% of 1,205 = ___________ (d) 411>2% of $11.98 = __________ (e) 25 1>4% of 20 = __________

2. A buyer purchased 460 pairs of men’s jeans. If 5% had straight legs, how many pairs of straight-leg jeans were in the order?

3. A salesperson in the furniture department receives an 111>4% commission on sales. If he sold $2,200 worth of furniture in May and $1,200 in June, what was his total commission for the two months?

4. A salesperson in the children’s department waited on 50 customers in one day. If 42% were grandmothers, how many grandmothers were served?

5. A large corporation owns 20 retail stores across the United States. If 20% sell shoes, how many stores sell shoes?

6. Taxes reduce your weekly salary by 22%. How much is deducted if you make $280 a week?

Finding the Percent To find what percent (rate) one number is of another, divide the base into the percentage amount. In most problems involving percents, the base amount is larger than the percentage amount, causing the quotient to be a decimal number. Thus, to find the percent (rate), move the decimal point two places to the right and add a percent sign. Percent ⴝ Percentage Amount ⴜ Base

Example 2-20 20 is what percent of 40? Percent = Percentage Amount , Base = 20% = 40 = 0.50 = 50%

Basic Merchandising Mathematics

31

Example 2-21 A suit retails for $240. If the price of the suit is reduced by $60, what is the percent reduction? Percent = Percentage Amount , Base = $60 , $240 = 0.25 = 25%

Example 2-22 In the shoe department, there are 3 female and 5 male sales associates. What percent are female? Percent = Percentage Amount , Base = 3 , 8 (total number) = 0.375 = 37.5%

Example 2-23 A store received 21 dozen Christmas tree ornaments. The buyer sent 6 1>2 dozen to one branch store and 8 1>3 dozen to another branch store. The remaining ornaments were kept at the main store. What percent of the ornaments were left at the main store? Total ornaments received in units = 21 dozen * 12 per dozen = 252 units Omaments sent to branches in units = 6.5 dozen * 12 per dozen = 078 units + 8 1>3 dozen * 12 per dozen = 100 units 178 units Omaments left at the main store (percentage amount) = (252 - 178) = 74 Percent = Percentage Amount , Base = 74 , 252 = 0.29365 = 29.37%

Practice Problems • Exercise 2.5 1. (a) $2.42 = ______________% of $44 (b) $123.75 = ______________% of $225 (c) 277.55 = ______________% of 1,220 (d) 55.2 = ______________% of 100 (e) $7.38 = ______________% of $36.90

32

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2. Sales for one week in the shoe department were $20,480. If John’s sales were $1,280, what was his percent of total sales?

3. The buyer in the gift department ordered 125 baskets. When the order was received, it was found that 85 of the baskets were damaged by water. What percent of the baskets was damaged?

4. A store received a shipment of 840 porcelain figurines. The buyer sent 230 to one branch store and 106 to another branch store. The remaining figurines were kept at the main store. What percent was left at the main store?

5. A firm’s staff includes 161 men and 89 women. What percent of the staff is female?

6. The visual merchandising staff borrowed 410 sterling silver ornaments from the gift department to use for Christmas decorations throughout the store. This left only 200 silver ornaments in the department. What percent was used as store decorations?

7. The sportswear buyer ordered 216 cotton sweaters and 258 wool sweaters. Cotton sweaters made up what percent of the order?

8. The china department received 32 dozen glasses. If 11 glasses were broken, what percent was broken?

9. The cosmetics buyer ordered 10 dozen bottles of perfume. If 24 units sold in one week, what percent remained?

10. A buyer purchased 6 1>2 dozen T-shirts. If 3 1>3 dozen were 100% cotton and the remaining T-shirts were a cotton/polyester blend, what percent of the order was 100% cotton T-shirts?

Basic Merchandising Mathematics

33

Finding the Base To find the base, divide the percentage amount into the percent. As you learned earlier in the chapter, if you are doing this without a calculator, the percent (rate) must be changed to its decimal form by moving the decimal point two places to the left (the same as dividing by 100). Base  Percentage Amount  Percent

Example 2-24 48 is 12% of what amount? Base = Percentage Amount , Percent = 48 , 12% = 400 Check your answer; find 12% of 400 = 48.

Example 2-25 During a back-to-school sale, a salesperson in the shoe department sold $888 worth of children’s shoes. This dollar amount represented 8% of total sales. Calculate total department sales. Reword the given information: 8% of ____________ = $888 or

$888 is 8% of

Base = Percentage Amount , Percent

= $888 , 8%



= $11,100

Check $11,100 * 8% = $888

Example 2-26 The men’s furnishings department received a shipment of ties. The department manager put 65% of the new ties in stock and the remainder in the stock room. If the ties that were put in the stock room had a value of $700, what was the value of the merchandise put on the floor? Hint: Calculate the total value of the merchandise and then the value of merchandise on the floor. Total Merchandise or Base = Percentage Amount , Percent

= $700 , (100% - 65%)



= $700 , 35%



= $2,000 Merchandise on the floor = $2,000 * 65%



= $1,300

Example 2-27 Sales last week totaled $12,638, an 8.6% increase over the previous week’s sales. What were sales for the ­previous week? 34

chapter 2

Sales for the previous week represent the baseamount, Percent increase

100.0% + 8.6% 108.6%

Last week’s sales were 108.6% of the previous week’s sales. Base = Percentage Amount , Percent = $12,638 , 108.6% = $11,637 (rounded to nearest dollar) Check $11,637 + ($11,637 * 8.6%) = $12,638

Practice Problems • Exercise 2.6 1. (a) $36.50 = 12 1>2 % of ___________ (b) 25% of ___________ = $144 (c) 0.95 = 1% of ____________ (d) 2 1>2 % of ______________ = $37.56 (e) 3.198 = 20% of

2. In a shipment of dishes, merchandise valued at $750 was damaged. The damaged goods amounted to 6% of the total order. What was the total value of the merchandise ordered?

3. Jane’s sales for one week were $1,250, which was 2% of the department’s weekly sales. What were the department’s total sales for the week?

4. A salesperson made $842 in commissions during the month. If his commissions averaged 12.5% of total sales, what were the total sales for the month?

5. During a special Easter sale, two salespeople sold goods worth a total of $850, which was 20% of the total sales for the department. What were the department’s sales?

6. The men’s department received a new shipment of fleece robes. During the first day on the floor, 60 robes, or 30% of the group, sold. How many robes were in the shipment?

Basic Merchandising Mathematics

35

7. Forty-five percent of the handbags ordered for the spring–summer season were leather. If the leather handbags had a total value of $22,500, what was the value of the nonleather handbags?

8. Thirty-two sales associates were assigned to departments located on the second floor; the figure represented 16% of the total sales associates. How many sales associates were assigned to departments on other floors?

9. Sales last month totaled $150,480, a 4.5% increase over the previous month’s sales. What were sales for the previous month?

10. Sally’s sales for last Sunday were $1,278. That was an increase of 6.5% over her sales for the previous Saturday. What were her sales for the previous Saturday?

Calculating Percent Increase or Decrease Retailers are constantly evaluating sales performance and comparing this year’s figures with last year’s. Both year-to-date and monthly comparisons are made. Retailers need to know how they are doing financially. Is the store having a gain or loss of sales? Which departments or store units are showing increasing sales and which are having decreasing sales? Which merchandise classifications are reflecting a gain in sales and which are showing a loss? Store units, salespeople, managers, and buyers are evaluated in this manner. Percentage change is determined because the figures can be compared more easily than dollar amounts. To find the percent increase or decrease, determine the difference between the two numbers and divide by the base number. The base number is always the previous number, as in last year, last month, last week, depending on the time frame used. The answer will be a decimal; therefore, convert it to a percent by moving the decimal point two places to the right and adding a percent sign. Use the following formula to find a percent increase or decrease: % Increase or Decrease ⴝ

Difference Between Two Figures Previous Figure

Example 2-28 The sales volume for the fashion jewelry department last year during the month of September was $20,000. This year September’s volume was $22,000. Determine the percent increase in sales. % Increase = ( This Year - Last Year) , Last Year =

$22,000 - 20,000 $20,000

= 0.10 = 10% increase

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chapter 2

Example 2-29 The price of a man’s suit was reduced from $500 to $400. Determine the percent decrease in price. % Reduction = (Current Price - Previous Price) , Previous Price = ($400 - $500) , $500 = 0.20 = 20% decrease

Example 2-30 Last year, the men’s clothing department had sales of $248,936. This year the sales were $256,782. What was the percent increase in sales? % Increase = (This Year - Last Year) , Last Year = ($256,782 - $248,936) , $248,936 = 0.031518 = 3.15% increase

Example 2-31 The junior dress department had planned sales of $38,600 for the month. Actual sales for the month were only $33,846. What was the percent decrease from the plan? % Decrease = (Planned Sales - Actual Sales) , Planned Sales = ($38,680 - $33,846) , $38,600 = 0.12316 = 12.32% decrease

Practice Problems • Exercise 2.7 1. The Loure-Decky factory in Switzerland produced 5,050 figurines this year. Last year, 12,150 figurines were made. What was the percent reduction?

2. Last year the buyer for the children’s department ordered 125 red velvet dresses for Christmas. This year the buyer ordered 205 velvet dresses. What was the percent increase?

3. The price of a denim jacket was reduced from $225 to $175. What was the percent reduction?

4. During this year’s midnight sale, the bedding department sold 195 bedspreads. Last year only 180 were sold. What was the percent increase?

Basic Merchandising Mathematics

37

5. Last year $226 was taken from Frank’s monthly wages for taxes. This year the monthly taxes were $304.50. What was the percent increase?

6. As manager of the accessories department, you plan to sell loop earrings worth $38,000 next year. This year, loop earrings worth only $21,000 were sold. What is the percent increase planned for next year’s sales?

7. Sales for the month of October had been planned at $26,000; however, actual sales were $28,286. By what percent did sales exceed the plan?

8. This year, Peg’s Boutique had sales of $86,916 during the month of March. Last year’s sales were $82,374. Calculate the percent increase.

9. If sales for a certain period were planned at $2,600 and actual sales for the period were $1,800, what was the percent decrease from the plan?

10. Determine the percent increase if last year’s sales were $6,600 and this year’s sales were $7,000.

Definitions Definitions

Dozen – A group of 12 items.

Findings – Sewing or trade term for small functional items and trimmings, such as buttons, snaps, zippers, hooks, shoulder pads, and seam tape, used to complete a garment. Gross – Twelve dozen items, or 144 units.

Percent or Percentage – A part of a whole, expressed in hundredths. Problems concerning percents involve three major elements.

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Base – The total amount, which is 100% (percentage amount , percent). Percent – The relationship one number/amount is to the whole/ base (percentage amount , base).

Percentage Amount – The fractional amount of the result of multiplying the base by the percent (base * percent). Unit – A single quantity regarded as a whole in a calculation.

Summary Problems Chapter 2 • Summary Problems 1. Fill in the blanks for each of these problems:

1

> 2% of 475.5 = ___________

(a) 400 = ____________% of 2,000

(f)

(b) 55% of $2,540 = ____________

(g) 105% of 2,500 = ___________

(c) 21 ½ % of $575.45 = _____________

(h) 54 = ___________% of 10,800

(d) 232.17 = 351 > 2% of ___________

(i)

(e) $2,161.25 = 331 > 4% of __________

(j) 300 = 100% of _____________

111 > 4% of 850 = _____________

2. John’s sales for the week totaled $9,271.43, a 6.5% increase over his sales the previous week. What were his previous week’s sales?

3. Hair combs were selling at a special price of 2 for $3.50. How many combs could you purchase for $12.25?

4. What is the dollar savings when a customer receives a 143 > 4% discount on a $959 dining table?

5. Find the cost of 125 men’s suits at $310.15 each and 14 dozen ties at $4.25 each.

6. A total of 150 ties were placed on a markdown rack at $5.99 each. If 2 > 3 of them were sold in one day, how many ties were left on the rack?

7. Washcloths were selling for $1.88 each. If 141 > 4 dozen cloths were sold, what was the retail value of the total sales?

Basic Merchandising Mathematics

39

8. A buyer in the men’s department ordered ties from three different companies in the following quantities: 161 > 2 dozen, 211 > 3 dozen, and 9 1>4 dozen. What was the total number of ties ordered? (Give your answer in units.)

9. A salesperson had the following sales: $15.50, $18.98, $16.98, $14, $18.50, and $22. What was the average sale?

10. A store gave a customer an allowance of $10.50 on a dress that originally sold for $285.99. How much did the customer pay for the dress if the sales tax was 6.5%?

11. A large retail store hired 27 new members for the executive training program. Of this group, two-thirds had previous retail work experience. How many had previous retail work experience?

12. A customer bought the following items for her children during a back-to-school sale: 2 dresses at $31.50 each 1 purse at $10.98 5 pairs of socks at 2 pairs for $3 3 shirts at $8.99 each 1 skirt at $12.95 What was the total purchase amount?

13. The manager of a clothing store planned to give free turkeys to salespersons selling over $10,000 during the fall harvest sale. Of the 110 salespersons working at the store, only 8 sold over $10,000. What percent of the salespersons received turkeys?

14. Last week, Linda’s commission check was $84. If she earns a 12.5% commission on sales, what were her total sales?

15. During last year’s anniversary sale, the rug department sold 425 wool area rugs. If this year’s sales units declined 20% from last year’s figure, how many rugs were sold this year?

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16. A salesperson in the furniture department receives 8% commission on special orders and only 5% commission on goods on hand. How much would he receive in commissions if he sold $30,500 of special-order furniture and $20,552 of furniture on hand?

17. A buyer for the men’s department purchased 18 1>4 dozen leather belts that cost $96 a dozen. What was the total cost of the belts?

18. In the lingerie department, the manager kept 15% of the total inventory in the stock room and the rest displayed on the floor. If $30,000 worth of goods were placed in the stock room, what was the dollar amount of inventory on the floor?

19. To cut costs and improve profits, a retailer announced the closing of 75 unprofitable stores and the release of 4,900 employees, 2% of the company’s workforce. How many employees remained after these 4,900 left the company?

20. A firm announced its plan to release 2,300, or 10%, of its managers. How many were employed before the 2,300 reduction?

Basic Merchandising Mathematics

41

PROFITABILITY OBJECTIVES • To define the elements of a skeletal profit-and-loss statement. • To complete a skeletal profit-and-loss statement. • To understand the importance of controlling expenses in order to maximize profits. • To express gross margin, expenses, and profit as a percent of net sales. • To recognize and calculate productivity or efficiency measures, including human resource, space, and inventory productivity. KEY POINTS • Operating profit is the result of relationships among sales, cost of merchandise sold, and expenses. • A loss occurs if expenses exceed gross margin; a profit occurs if expenses are less than gross margin. The use of percents in an operating statement facilitates an analysis of individual factors. • Department and specialty stores evaluate profitability on margin results such as gross margin, contribution, and profit. • Controlling expenses is increasingly important, because escalating costs have created a “profit squeeze.” • Both retailers and manufacturers use sales figures to measure productivity.

3 43

• The productivity of human resources, typically the largest expenses of a retail firm, is commonly measured through thorough analysis of selling costs, units per transaction, sales per transaction, and sales per full-time employee equivalent. • Data on sales per square foot and sales per linear foot of shelf space are used to monitor the productivity of a department, a store, a merchandise category, a vendor, or an entire shopping center and may be used in planning sales and determining the space needed for a merchandise category. • Retailers review stock turnover, gross margin, and gross margin return on inventory to gain insight on the productivity of dollars invested in inventory.

Career Corner Vice President of Human Resources Merle Mack

Relevance of Merchandising Mathematics

Kohl’s Department Stores

While there is a certain art to picking the right merchandise, to make money, the math has to work. As a merchant, the ability to effectively analyze your business is critical.

Description of Job Responsibilities

Merle Mack/j Kohls Dept. Stores

As the Vice President of Human Resources, I am responsible for the acquisition, development, training, engagement, and retention of multiple levels of talent for 270 Kohl’s stores. In this capacity, I support business partners in executive talent management, including the selection, placement, and succession planning of talent. I also lead the Human Resources (HR) Generalist team for support of nearly 40,000 hourly associates.

Career Path My qualifications before taking on the role as Vice President of Human Resources include more than 20 years of store operations leadership through roles as an assistant, store, and district manager for Pizza Hut, Target, and Kohl’s. Advice for Students Interested in Merchandising Careers Leadership is the critical component in any retailing career. Whether as a merchant, operator, or in a support capacity, leadership is vitally important. Gather leadership experiences that will allow you to collaborate in solving significant problems. Practice idea leadership where you must sell your idea to gain support and build practical implementation plans. Stay open to a variety of experiences and options—you might start as a merchant, but find you have interest and applicability in other challenging areas of the business.

Career Corner District Manager David Schwarz

Relevance of Merchandising Mathematics

The TJX Companies, Inc.

At Marshalls, we use retail math to increase and measure profit and productivity. Retail math is utilized for inventory management, creating budgets, and establishing expense control, which provides a road map to success.

Description of Responsibilities

Job

In one word, I am a teacher. As a District Manager, I am responsible for all aspects of 10–12 Marshalls stores, including, but not limited to, sales, operations, development, training, and shrink. The biggest part of my job is teaching, developing, and Dave Schwarz/TJX (Marshalls) training people. Coaching, a major aspect of my position, is what makes my job so much fun. I get to work through developing and watching people grow.

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Career Path After majoring in Marketing at Stephan F. Austin State University, I started working with a toy retailer and became the store manager within a year. After another year, a different retailer recruited me to run one of their stores. Then, a department store recruited me as a store manager. Seven years later that company closed and I became a manager with Marshalls. While working with Marshalls, I moved to a higher-volume store and subsequently was promoted to District Manager, my current position. In order to get promoted you have to understand that it is all about building relationships; you are only as good as the

without looking at and understanding the big picture. People often get wrapped up in small tasks that cause them to lose sight of the entire store environment. Have fun! You must enjoy what you do; don’t do something you don’t enjoy. If you enjoy merchandising, retail is a great place for you. When you are looking for a career, you must look for something you enjoy doing. You must work extremely hard, but when you enjoy what you do, it doesn’t feel like work.

people below you and how well you develop them. What makes one successful is developing, teaching, and supporting your sales associates. It’s all about your ability to coach your players. Advice for Students Interested in Merchandising Careers My best advice is to go into your career with an open mind, and never forget that hard work pays off. You must be willing to change and adapt in your position, while having the ability to see the big picture. Don’t get wrapped up in the small details

The purpose of retailing is to sell goods to satisfied customers at a profit. Profits are necessary to a business because they (1) allow for replacement of inventory and equipment, (2) allow for expansion of the business, and (3) provide a return for those who have invested in the business. Many people have a misconception of typical operating profits of retail stores. Profits vary greatly according to the type of store and the skill of management.

Relationship of Basic Factors Operating profit is the result of the relationships among 1. Sales volume 2. Cost of merchandise sold 3. Expenses The relationships among these three fundamental factors can be shown in a skeletal profit-and-loss statement (referred to as a skeletal statement because it contains only the major components, without showing in detail how the three factors are computed). The skeletal profit-and-loss statement shows five factors: the three basic merchandising factors of net sales, cost of merchandise sold, and expenses, plus gross margin and profit. Gross margin and profit are margins or “results”; they are what is left after two or more of the basic factors interact.

Example 3-1

(minus)

$

%

Net sales

100,000

100.00

Cost of merchandise sold

- 60,000

- 60.00

40,000

40.00

- 36,500

- 36.50

3,500

3.50

Gross margin (minus)

Operating expenses Operating profit

Gross margin is the difference between net sales and cost of merchandise sold. Gross margin is sometimes referred to as gross profit, a term that can be misleading, since expenses must be subtracted to determine profit. Gross margin is the amount available to cover expenses and provide profit. Gross Margin ⴝ Net Sales ⴚ Cost of Merchandise Sold Profitability

45

Gross margin is an important figure because it shows the margin on merchandise alone. Sales and cost of merchandise sold are figures over which the buyer has a great deal of control. By looking at gross margin figures, buyers and merchandise managers can see at a glance whether sales and/or cost of merchandise sold figures need improvement. (Chapters 4 and 7 will explain how cost of merchandise sold is calculated.) Gross Margin ⴝ Profit ⴙ Expenses Gross margin could also be calculated by adding profit and expenses. (Remember, this is not the way gross margin is shown on the skeletal profit-and-loss statement.)

Example 3-2

Operating expenses

$

%

36,500

36.50

Operating profit

+ 3,500

+ 3.50

Gross margin

40,000

40.00

A retailer may have other sources of income, such as rent or interest, that provide another type of income and, consequently, also contribute to profit.

Example 3-3 $ Net sales (minus)

Cost of merchandise sold Gross margin

(minus)

(plus)

Operating expenses

%

200,000

100.00

- 126,000

- 63.00

74,000

37.00

- 60,000

- 30.00

Operating profit

14,000

7.00

Other income

+ 2,000

+ 1.00

Net profit before federal income tax

16,000

8.00

In working with figures in a skeletal profit-and-loss statement, the columns—both dollars and percents—can be checked by adding up from the bottom. If gross margin were eliminated, the dollars and percents would total net sales, 100%.

Example 3-4 $ Cost of merchandise sold

%

126,000

63.00

(plus)

Expenses

+60,000

+30.00

(plus)

Operating profit

+ 14,000

+ 37.00

Net sales

200,000

100.00

Operating profit occurs when gross margin exceeds expenses. If expenses are larger than gross margin, a loss occurs. A loss should be enclosed in parentheses to emphasize that it is a loss rather than profit. Profit or (Loss) ⴝ Gross Margin ⴝ Expenses 46

chapter 3

Example 3-5 $ Net sales Cost of merchandise sold Gross margin Expenses Operating loss

%

68,000

100.00

- 39,500

- 58.09

28,500

41.91

- 29,800

- 43.82

(1,300)

(1.91)

To find the percent of any one factor—gross margin, expenses, or profit—divide the dollar amount of that factor by net sales. It is important to note that net sales, and not gross sales, are your base number. (Both gross sales and net sales will be discussed later in the chapter). Expense % ⴝ $ Expenses ⴜ $ Net Sales Gross Margin % ⴝ $ Gross Margin ⴜ $ Net Sales Profit % ⴝ $ Profit ⴜ $ Net Sales

Example 3-6 If net sales are $100,000 and expenses total $40,000, find the expense percent. Solution: Expense % = = = =

$ Expenses , $ Net Sales $40,000 , $100,000 0.40 40%

In other words, expenses totaled 40% of net sales. The skeletal profit-and-loss statement, often referred to as a profit-and-loss (P&L) statement, operating statement, or income statement, summarizes the income, cost of merchandise sold, and expenses for a specific period, which may be a month, a quarter, a season, or a year. The skeletal profit-and-loss statement may be prepared for specific departments, an entire store, several stores that make up a district or region within a corporation, and/or another retail format such as a catalog or online division. To be complete, the skeletal profit-andloss statement must show the percents corresponding to the dollar figures. The figures on a skeletal profit-and-loss statement may be utilized in many ways. For example, if profit is unsatisfactory, the relationships among all the contributing factors must be analyzed and compared with previous statements and industrywide figures in order to suggest best strategies for improving profit. The only meaningful way to compare current performance with a previous season’s performance, with year-to-date performance, or with industry statistics is to express each factor as a percent of net sales. Even though sales volume differs from season to season (and is, hopefully, increasing), the percents allow easy comparisons.

Example 3-7 Last Year $ Net sales Cost of merchandise sold Gross margin Expenses Profit

%

Planned $

%

36,000

100.00

30,000

100.00

- 16,920

- 47.00

- 14,000

- 46.67

19,080

53.00

16,000

53.33

- 18,360

- 51.00

- 15,250

- 50.83

720

2.00

750

2.50

Profitability

47

In the previous example, profit, in dollars, increased slightly even though sales decreased. This improved performance was the result of decrease in both cost of merchandise sold and expenses. Because cost of merchandise sold, gross margin, expenses, and profit are all expressed as percents of net sales, it is easy to calculate net sales when the dollar and percent figures are given for any one factor. (Remember the formula from Chapter 2: Base = Percentage Amount , Percent.) $ Net Sales ⴝ $ Profit ⴜ Profit %

Example 3-8 Last season, operating profit was $5,000, which represented 2% of net sales. Find net sales. Solution: $5,000 is 2% of what number? $ Net Sales = $5,000 , 2% = $250,000 Check your answer:

$250,000 * 2% = $5,000

Example 3-9 Set up a skeletal profit-and-loss statement, given the following data: Gross margin

$130,000

Expenses

$125,000

Profit

2.0%

Solution: Set up relationships among factors:

Net sales Cost of merchandise sold Gross margin

-

$

%

(b)

100.00% -

(c)

$130,000

(e) -

- $125,000

Expenses Profit

(a)

(d)

(f)

2.00%

(a) Profit = $130,000 - $125,000 = $5,000 (b) Net sales = $5,000 , 2% = $250,000 (c) Cost of merchandise sold = $250,000 - $130,000 = $120,000 (d) Cost of merchandise sold % = $120,000 , $250,000 = 48.00% (e) Gross margin % = $130,000 , $250,000 = 52.00% (f) Expense % = $125,000 , $250,000 = 50.00%

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Practice Problems • Exercise 3.1 Problems 1–8: Set up skeletal profit-and-loss statements. In the operating statements for Exercise 3.1, round dollar figures to the nearest dollar and show all percents correct to two decimal places. 1. Net sales

$14,000

Cost of merchandise sold

$7,200

Expenses

$5,900

2. Net sales

$187,000

Cost of merchandise sold Expenses

3. Net sales Cost of merchandise sold

$109,000 38.5%

$242,000 $134,600

Expenses

38%

4. Net sales

$687,520

Cost of merchandise sold Profit

5. Net sales

56.12% 4.08%

$79,800

Gross margin

44.6%

Expenses

45.0%

6. The designer department had net sales of $300,000. There was 1% loss; gross margin was 49%.

7. Gross margin

$47,800

Expenses

$49,150

Loss

(0.8%)

8. Gross margin

$68,900

Expenses

$69,500

Loss

(0.4%)

Profitability

49

9. Determine the percent of gross margin necessary to achieve a net profit of 4%. Estimated net sales are $100,000; estimated operating expenses are $44,000.

10. Analysis of last year’s figures showed gross margin and expenses of 42% and 39%, respectively. It is anticipated that this year expenses will increase 1.5%. A profit goal of 4.5% has been set. What cost of merchandise percent will be necessary?

Basic Profit Factors The store’s operating income is received from customers in exchange for merchandise and services. In retailing, the terms operating income, sales volume, and sales productivity all refer to net sales.

Net Sales To arrive at net sales as shown on the skeletal profit-and-loss statement, customer returns are subtracted from gross sales. Gross sales are the total of prices charged to customers (both cash and credit sales) for all merchandise and services before any deductions for customer returns are made. Gross Sales ⴝ Net Sales ⴙ Customer Returns Net sales are the sales a store has left after deducting customer returns from gross sales. Net Sales ⴝ Gross Sales ⴚ Customer Returns The customer returns percent is calculated by dividing the dollar sum of customer returns by gross sales. (This is the only time that a percent is based on gross sales.) Customer Returns % ⴝ $ Return ⴜ $ Gross Sales

Example 3-10 Calculate the percent of customer returns for a week with the following figures: gross sales, $7,500; returns, $95 on Monday, $19 on Tuesday, $50 on Wednesday, $140 on Thursday, $160 on Friday, and $80 on Saturday. Solution: Returns: Monday Tuesday Wednesday Thursday Friday Saturday

$95.00 $19.00 $50.00 $140.00 $160.00

Total

$544.00

$80.00

Returns % = $ Returns , $ Gross Sales = $544 , $7,500 = 7.25% 50

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Example 3-11 Net sales for a department were $128,644; customer returns were $6,846. What was the percent of returns? (Remember, to express customer returns as a percent, the percent is based on gross sales.) Solution: $ Gross Sales = $ Net Sales + $ Returns = $128,644 + $6,846 = $135,490 Returns % = $ Returns , $ Gross Sales = $6,846 , $135,490 = 5.05% The following formula will also be helpful in working some problems: $ Gross Sales ⴝ $ Net Sales ⴜ Gross Sales % Complement

Example 3-12 Net sales of handbags were $187,680. Customer returns were 8.5%. Find gross sales. (Note In this situation, gross sales = 100%) Solution: Gross sales

100.00%*

Customer returns

- 8.50%

Gross sales complement

91.5%

$ Gross Sales = $ Net Sales , Gross Sales % Complement = $187,680 , 91.5% = $205,114.75 Note: *Working with customer returns is the only instance when gross sales represent 100%. Normally, percents are calculated with net sales as 100%, the base amount.

Example 3-13 Set up a skeletal profit-and-loss statement, given the following data: Gross sales

$583,260

Customer returns

8.65%

Cost of merchandise sold Expenses

48.35% $251,870

Solution: $ Net sales Cost of merchandise sold Gross margin Expenses Profit

(a) -

(c) (d)

- $251,870 (e)

% 100.00% -

(b)

51.65% -

(f) (g) Profitability

51

(a) Net Sales = $ Gross Sales - $ Customer Returns = $583,260 - ($583,260 * 8.65%) = $583,260 - $50,452 = $532,808 (b) Cost of Merchandise Sold % = Net Sales% - Gross Margin% = 100.00% - 51.65% = 48.35% (c) Cost of Merchandise Sold = $ Net Sales * Cost of Merchandise Sold% = $532,808 * 48.35% = $257,613 (d) Gross Margin = $ Net Sales - $ Cost of Merchandise Sold = $532,808 - $257,613 = $275,195 (e) Profit = $ Gross Margin - $ Expenses = $275,195 - $251,870 = $23,325 Corresponding Percent: (f)

Expense % = $ Expenses , $ Net Sales = $251,870 , $532,808 = 47.27%

(g) Profit % = $ Profit , $ Net Sales = $23,325 , $532,808 = 4.38%

Practice Problems • Exercise 3.2 1. Determine net sales if gross sales were $98,656 and customer returns were 4.8%.

2. Net sales were $126,810; customer returns totaled $6,080. Calculate customer returns percent.

3. Gross sales were $236,438; net sales were $224,176. Determine customer return percent.

4. Last week, Ms. Smith had gross sales of $986.35. Her customer returns totaled $112. Calculate the percent of sales returned.

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5. The ladies’ shoe department has four salespeople. Calculate the sales return percent (a) for each salesperson and (b) for the department as a whole. Salesperson

Gross Sales

Customer Returns

$1,441

$109

1,098

76

Carrie

934

98

David

734

46

Alice Brandon

6. Customer returns were 12.5% in the sportswear department. Determine gross sales if net sales totaled $438,418.

7. For the answers to this question, round dollar figures to the nearest dollar and show all percents correct to two decimal places. Set up a skeletal profit-and-loss statement, given the following data: Gross sales

$680,366

Gross margin

$271,251

Customer returns Expenses

9.80% 41.70%

8. For the answers to this question, round dollar figures to the nearest dollar and show all percents correct to two decimal places. Set up a skeletal profit-and-loss statement, given the following data: Gross sales

$86,536

Customer returns

$9,214

Expenses

45.64%

Loss

(1.78%)

9. For the answers to this question, round dollar figures to the nearest dollar and show all percents correct to two decimal places. Set up a skeletal profit-and-loss statement, given the following data: Gross sales

$120,000

Customer returns

18,562

Gross margin

45,220

Profit

4,000

Profitability

53

10. The home furnishings department of Zachary’s Furniture Store had the following sales and returns: Salesperson

Gross Sales ($)

Customer Returns ($)

Christopher

33,420

1,566

Jonathan

40,580

6,410

Kay

20,120

1,020

Suzanne

15,890

750

Zachary

35,420

1,525

Determine the customer return percent (a) for each salesperson and (b) for the department as a whole.

Cost of Merchandise Sold Total cost of merchandise sold is influenced by several factors: billed cost of merchandise, transportation, cash discounts, and alteration/workroom costs. These factors must be controlled in order to maintain or improve profit. The calculation of total cost of merchandise sold will be explained in Chapter 4 and covered in Chapter 7.

Operating Expenses The various expenses incurred by the operation of the business (excluding cost of merchandise sold) are subtracted from gross margin to determine operating profit. If expenses exceed gross margin, a loss occurs. The expenses of operating a store include the cost of wages for selling and nonselling employees, management salaries, rent, utilities, advertising, supplies, fixtures, information technology systems, taxes, insurance, bad debts, buyers’ travel, and more. There are many ways of classifying expenses. The expense classification system used will depend on the purpose for which expenses are being analyzed. Traditionally, expenses are generally classified as direct and indirect. Direct expenses are the result of the operation of one specific department and would not occur if the department were eliminated. Most notably, the department’s sales manager controls direct expenses. However, before the buying activities were moved to a central office, buyers had some control over direct expenses. Examples of direct expenses include the cost of wages of sales personnel, department advertising, supplies necessary for selling, and buyers’ and managers’ travel expenses. Indirect expenses benefit the store as a whole and would continue even if a particular department were discontinued. Examples include rent, the cost of store maintenance, insurance, salaries of senior executives, and institutional advertising. In multiunit retail corporations, store managers and sales managers, rather than buyers, are now responsible for supervision and staffing of the selling floor. Selling personnel may be assigned to an area containing merchandise from several departments. The traditional system of classifying expenses as direct and indirect may not be appropriate in these businesses. The central organization that includes buyers may be accounted for separately. The NRF Retail Accounting Manual points out that there are many different approaches to departmental distribution of expenses. Moderate- and large-sized stores prepare operating statements for each department, store, and other retail format on a regular basis, perhaps monthly or weekly, to analyze results and make necessary adjustments as soon as possible. Companies that classify expenses as direct or indirect may calculate a department’s contribution or controllable margin in place of, or in addition to, departmental profit. 54

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Contribution, or controllable margin, is the amount left after direct expenses are subtracted from gross margin. This is the amount the department, store, or other retail format contributes to indirect expenses and profit. The calculation of a contribution figure emphasizes the importance of controlling expenses directly related to the selling department, store, or other retail format. A contribution figure provides a better picture of the operation of the unit than does the gross margin figure alone. Today, as a result of mergers, accounting is a corporate-level function for the majority of retail firms. As was discussed in Chapter 1, centralized buyers are not located in the stores and, therefore, have less control over contribution than decentralized buyers have.

Expense Control Compared with typical manufacturing organizations, retailers operate with relatively low gross margins. A low gross margin means that it is very important to maintain expenses at the appropriate level. Retailers are experiencing a “profit squeeze,” which results from the difficulty they are now having in increasing gross margin to keep up with increased expenses. For example, expenses related to energy consumption, travel, and labor have escalated in recent years. Control of expenses and increased productivity are keys to generating an adequate profit. The concept of control does not mean elimination; control has to do with careful monitoring and making adjustments as soon as a factor appears to be slightly out of line. The first step in expense control is planning the appropriate level of expenses. As the season progresses, actual performance is compared against planned figures. The cost of labor is a major expense for all retailers. Due to increased store hours, increased wages, and more costly fringe benefits, payroll costs have escalated. In most large stores, payroll is the largest controllable expense. Retailers must carefully plan and control payroll expense. The cost of sales personnel has been a major factor in many stores changing to self-selection or self-service formats and centralized checkout.

Profit Performance Improvement For a company to stay viable and continue to exist, it must produce a profit. When profit results are not at an acceptable level, it is imperative that managers or business owners take action. Net sales are one of the most important factors to address when developing a profit improvement strategy. A successful plan would include analyzing sales and putting plans into place that will increase sales performance. These plans may include looking at the following aspects of the business: Merchandise—Do I have the correct merchandise to meet my customer’s needs? Visual Presentation—How is the merchandise presented? Is it presented in a way that will attract my customers to purchase the products? Human Resources—Do I have the right selling team in place? Are they trained to sell the merchandise? Do they have the product knowledge and skills necessary to sell the merchandise? Reduction of Customer Return Percent—Do the store’s associates meet the needs of the customers? Another way to increase operating profit is to reduce expenses. As previously discussed, payroll is generally the largest expense within any organization and is most often the expense that is addressed first. Many organizations may consolidate offices or positions in order to reduce the number of employees. When reducing staff, managers should make sure they are not negatively impacting the level of customer service, which will then impact sales. This staff reduction strategy has the potential to place an organization or store into a negative downward spiral. In some instances it may be more beneficial to look at other ways of scheduling employees or organizing workloads. For example, if in a store environment, the busiest time of the day is from 12:00 noon to 3:00 p.m., the manager should schedule fewer employees in the morning or off-peak hours and more staff during the peak business times of noon to 3:00 p.m. Many organizations use sophisticated computer systems that monitor business trends and schedule employees accordingly. When there is an increase in sales and a decrease in expenses, a higher profit percent will be realized. Higher profit percents, in turn, allow companies to reinvest in the organization and continue doing business with profitable Profitability

55

results. Careful analysis of regular, periodic skeletal statements provides information for managerial decisions that will ensure satisfactory relationships among all factors, thus maximizing profits.

Performance Measures It is important for retailers to measure the productivity or efficiency of sales personnel, space, and inventory. Productivity is output produced compared with input expended. As a rule, the more output produced per employee hour or dollar investment, the more profitable a company is. Retailers continually strive to improve the productivity of their three principal assets: human resources, space, and inventory. Remember that although it is extremely important to analyze financial information in dollars and cents, it is essential that percents and ratios be used if data are to be compared with past performance or industry standards.

Human Resource Productivity The productivity of human resources can be measured in a number of ways, including selling cost, sales per transaction, sales per employee hour, and sales per full-time employee equivalent.

Selling Cost Selling cost percent is important in scheduling sales assistance. The relationship between sales productivity (net sales) and wages is called selling cost and can be calculated for an individual salesperson, a department, and/or the store or other retail format as a whole. Gross wages are an employee’s pretax compensation based on hours worked times an hourly rate of pay. Gross Wages ⴝ Number of Hours Worked : Hourly Pay Rate Selling Cost % ⴝ Gross Wages ⴜ Net Sales

Example 3-14 What would be the selling cost percent for a person who earned $90 during a week when net sales were $1,000? Solution: Selling Cost % = Gross Wages , Net Sales = $90 , $1,000 = 9.0%

Example 3-15 Calculate the selling cost percent for a person who worked 38 hours at a wage of $8.10 an hour and had net sales of $2,849. Solution: a. Calculate gross wages. Gross Wages = Number of Hours Worked * Hourly Pay Rate = 38 * $8.10 = $307.80 56

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b. Calculate selling cost %. Selling Cost % = Gross Wages , Net Sales = $307.80 , $2,849 = 10.80%

In addition to receiving hourly wages and straight salaries, sales personnel may be compensated by commission. Commission is a percentage of net sales paid to the seller of the merchandise. Retailers such as Nordstrom and Neiman Marcus pay commission to encourage excellent customer service. They believe that their salespeople will work harder with the incentive of commission. In wholesale companies, sales representatives may also work on commission. In-house sales representatives who work at corporate headquarters or a company-owned showroom usually receive a lower percentage commission than do road representatives, who are paid a higher commission percentage because they are expected to cover their travel expenses. Commission $ ⴝ Net Sales : Commission %

Example 3-16 Calculate the commission a salesperson would earn on a net sale of $1,200 if the commission were 10% of net sales. Solution: Commission $ = Net Sales * Commission % = $1,200 * 10% = $120

Salespeople may calculate their average commission earnings per hour by dividing their total commission by the number of hours they worked. Average Commission Earnings per Hour ⴝ Total Commission ⴜ Total Number of Hours Worked

Example 3-17 Calculate the average earnings per hour for a salesperson who worked 25 hours and earned a total commission of $275. Solution: Average Earnings per Hour = Total Commission , Total Number of Hours Worked = $275 , 25 = $11 per hour

Other retailers use a combination of hourly wages and commission for all or some of their employees. The combination guarantees the employee a minimum level of wages for conducting managerial and housekeeping tasks and also provides an incentive for selling through the added commission. Gross Earnings ⴝ (Number of Hours Worked : Hourly Rate) ⴙ (Commission $) Average Earnings per Hour ⴝ Gross Earnings ⴜ Total Number of Hours Worked Profitability

57

Example 3-18 A salesperson earns $10 per hour, plus 6% commission on sales. Last week she worked 38 hours and had net sales of $4,821. Calculate (a) selling cost percent and (b) average earnings per hour. Solution: a. Calculate gross earning. Gross Earnings = (Number of Hours Worked * Hourly Rate) + (Commission $) = (38 * $10) + ($4,821 * 6%) = ($380) + ($289.26) = $669.26 b. Calculate selling cost %. Selling Cost % = Gross Earnings , Net Sales = $669.26 , $4,821 = 13.88% c. Calculate average earning per hour. Average Earning per Hour = Gross Earnings , Number of Hours Worked = $669.26 , 38 = $17.61

Both retailers and wholesalers must pay close attention to selling cost percentage to ensure profitability. If the selling cost results are higher than the goal percent, the company must look at ways to increase sales and/ or reduce wages.

Units per Transaction Measures used to evaluate productivity include the number of transactions processed in a store, other retail format or department, the number of units sold per transaction, and the average dollar sale per transaction. A sales transaction is the processing of one sale. When a customer buys a sofa in a furniture store and a salesperson charges the sale, the exchange of money for goods constitutes one transaction. When a customer buys several items and the cashier rings up all of the items on the sales register, that exchange also constitutes one transaction. The number of transactions and the units per transaction are important in evaluating the performance of salespeople. Many retailers promote higher units of transactions by encouraging consumers to “fill their shopping carts.” Likewise, these retailers commonly use units per transaction (UPT) to evaluate the performance of their selling associates. UPT measure the average number of items that customers are purchasing in a transaction. The higher the UPT, the more items customers are purchasing during each visit. UPT can be calculated for an individual salesperson, a store or other retail format, or an entire company. The average UPT relates total units to the number of transactions. To determine the average units per transaction, divide the gross units purchased by the number of transactions for the period. Average Unit per Transaction ⴝ Gross Units ⴜ Number of Transactions

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Example 3-19 A salesperson sold 120 units and had 40 transactions, determine the average units per transaction. Solution: Average Unit per Transaction = Gross Units , Number of Transactions = 120 , 40 = 3

Sales per Transaction The dollar amount of sales made by individual salespeople does not tell the whole story. The salesperson with the highest dollar sales for a day might have had one high dollar transaction, whereas a salesperson with lower total sales may have had many transactions of smaller dollar amounts. The average dollar sale per transaction is an important measure of productivity. When this dollar amount increases, stores are doing a better job of selling to the customer. The average sale per transaction relates total gross sales to the number of transactions processed and is the same as the average sale. To determine the average sales per transaction, divide the gross sales by the number of transactions. Average Sale per Transaction ⴝ Gross Sales ⴜ Number of Transactions

Example 3-20 If gross sales totaled $25,400 on 112 transactions, determine the average sale per transaction. Solution: Average Sale per Transaction = Gross Sales , Number of Transactions = $25,400 , 112 = $226.79

Sales per Employee Hour Another measure of productivity used by some retailers relates sales for a period to the number of hours employees have worked during that period. Sales per employee hour is often used in retailing as a performance review component. Sales per employee hour is determined by dividing net sales by the total number of hours worked by employees during the specified period. Sales per Employee Hour ⴝ Net Sales ⴜ Number of Employee Work Hours

Example 3-21 During the past week, sales at one store totaled $359,000. During the same week, employees worked 3,890 hours. What were the sales per employee hour for the week? Solution: Sales per Employee Hour = Net Sales , Number of Employee Work Hours = $359,000 , 3,890 = $92.29

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Sales per Full-Time Employee Equivalent A common measure of productivity used by retailers is sales per full-time employee. Because many retail firms use a large number of part-time employees, this measure is calculated on the basis of the number of ­full-time equivalent employees. A full-time employee is defined as a worker who is employed on a year-round basis and who works a full workweek, generally 35 to 40 hours per week. Part-time hours worked are converted into the ­number of full-time equivalent employees. To determine the number of full-time equivalents, the retailer totals the number of hours worked by part-time employees and divides by the number of hours considered to be a ­full-time week. The U.S. Department of Labor does not define full-time or part-time employment leaving it to the discretion of the employer to define full-time status. Typically, most employers consider a full-time week to range from 35 to 40 hours with most defining 40 hours as a full-time week. Therefore, if part-time employees worked a total of 4,000 hours, the number of full-time equivalents for their part-time work would be 4,000 hours divided by 40 hours, or 100 full-time equivalent hours. Sales per full-time employee equivalent is the relationship between sales for a period of time and the number of full-time equivalent employees who worked during that period. To determine sales per full-time equivalent, first find the number of full-time equivalent hours worked by part-timers, and then add that number to the number of full-time employees. The resulting number is then divided into the net sales. Sales per Full@Time Equivalent  Net Sales  Number of Full@Time Equivalent Employees

Example 3-22 A department had weekly sales of $35,600. Two full-time employees worked 35 hours each, and 8 part-timers worked a total of 210 hours. If the store considers 35 hours to be full-time, determine the sales per full-time equivalent. Solution: Determine the number of full-time equivalent employees by dividing the number of hours worked by parttime employees by the number of hours the store considers a full-time workweek. Add this number to the number of full-time employees. Number of Full@Time Equivalents = 210 , 35 = 6 + 2 = 8 Divide total net sales for the department by the number of full-time equivalent employees. Sales per Full@Time Equivalent = Net Sales , Number of Full@Time Equivalents = $35,600 , 8 = $4,450 Other ways of measuring the productivity of salespeople include sales per salesperson and salespeople’s salaries as a percent of sales. Although sales per salesperson is a good measure of selling effectiveness, it can be distorted by inflation. An advantage of using salespeople’s salaries as a percent of sales is that this measurement is not distorted by inflation. The goal of most retailers is to increase human resource productivity by increasing sales. This goal can be accomplished by making sure the company has the right sales team in place and that the associates are trained with the knowledge and skill needed to meet company performance goals.

Practice Problems • Exercise 3.3 1. What was the selling cost percent for a person earning $105.60 whose gross sales were $1,049 and whose customer returns totaled $79.80?

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2. If a department needs to operate with a minimum selling cost of 8.5%, how much would a salesperson need to sell to have earnings of $100?

3. A salesperson working 40 hours per week received a wage of $7.75 per hour. If she sold $1,986 of merchandise, what was her selling cost percent?

4. If the salesperson in the previous problem received a raise to $8.00 per hour, what would be the new selling cost percent?

5. A store pays all of its employees $7.50 per hour. For the week, the store has scheduled 164 hours of sales help. If the store desires to maintain the same selling cost percent when the minimum wage goes to $8.00, how many hours of sales assistance can be allowed so that the store still maintains the same selling cost?

6. Last year, a store had two salespeople who worked 40 hours per week for $7.40 per hour and three salespeople who worked 28 hours per week for $7.25 per hour. With an impending increase in the minimum wage, wages for all salespeople will be increased, but hours will be reduced, so selling cost will remain the same. The two people previously earning $7.40 per hour will receive $8.00 per hour, but will work only 37.5 hours per week. The remaining hours will be split evenly among the three part-time employees. If part-time salespeople are paid $7.50 per hour, how many hours per week can each part-time salesperson work?

7. Last month Cody sold $26,500 worth of merchandise during the 168 hours he worked. He earns 7.5% commission. (a) How much did Cody make in commission? (b) What was his average earnings per hour?

8. Calculate the (a) gross earnings for each salesperson and (b) the selling cost percent for an entire department, given the following information:

Salesperson

 Gross Sales ($)

 Customer Returns ($)

Basis for Earnings

Hours Worked

Alexandria

8,796

897

8% commission

40

Brian

10,278

1,286

8% commission

36

Charles

7,340

674

$6>hr + 2% comm

32

Deirdre

6,896

458

$6>hr + 2% comm

28

Eve

6,958

573

$7.75/hr

32

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9. Sales associates in the designer dress department are paid an hourly wage plus commission. Calculate the selling cost percent (a) for each associate and (b) for the entire department under the following conditions: Sales Associate

Net Sales ($)

Hours Worked

Wage per Hour ($)

Commission(%)

Frank

9,796

38

7.75

2

Gwen

9,362

38

7.75

2

Heather

6,854

32

8.00

1

Jason

5,936

28

8.00

3

Kathy

4,815

20

8.00

3

Lacey

5,491

20

8.00

3

10. A store pays employees who are scheduled to work 38 hours per week at $7.50 per hour. The store wants to keep the same selling cost percentage, yet increase the hourly wage by 15 cents per hour. How many hours of sales assistance can be allowed so that the store still can maintain the same selling cost percentage?

11. Last week, a specialty store had total gross sales of $100,890 with 620 transactions. What was the average sale per transaction?

12. The average sale in a department store was $25.76 during a month when the store processed 50,568 customers. What were the store’s total sales for the month?

13. Harmony sold $2,720 worth of merchandise and 595 units in the 85 transactions she rang up during the 40 hours she worked last week. (a) Calculate Harmony’s average units per transaction sold for that week. (b) Determine Harmony’s average sale per transaction. (c) Determine the sales per hour Harmony worked.

14. According to payroll records, 45 employees worked during the past week. Of these employees, 21 were full timers who worked a regular 40-hour week. Part-time employees worked a total of 480 hours, and sales for the week were $68,000. What were the sales per full-time employee equivalent?

15. If a store uses a 40-hour workweek, determine the sales per full-time employee equivalent on the basis of the following information: the store has 5 full-time employees, and 10 part-time employees who work an average of 20 hours each; total sales are $28,900.

16. If sales for the week were $12,489 and employees worked 180 hours, determine the sales per employee hour.

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Space Productivity The most common measure of space productivity is sales per square foot of selling space. Sales per linear foot of shelf space is another measure used to evaluate space productivity.

Sales per Square Foot Data on sales per square foot of selling space are used to monitor the productivity of a department or store and may be used in planning sales and determining the space needed for a merchandise category. If a unit is operating below company or industry standards, efforts may be taken to increase the unit’s sales volume or to reduce the unit’s amount of space. Sales per square foot is a rough measure of return on investment, as the investment in a retail store is a function of the amount of space there is in the store. Construction costs are usually measured as so many dollars per square foot, and rent for retail space is often charged as so many dollars per square foot. Although a given figure for sales per square foot cannot be directly translated into a certain return on investment, a healthy sales-per-square-foot figure is generally associated with a healthy return on investment. Sales per square foot are the most common measure of space productivity in retailing. It is generally calculated for a total store and for individual departments, but also may be calculated for a merchandise category, a vendor, or even an entire shopping center. Although usually calculated on an annual basis, sales per square foot are sometimes calculated on a weekly basis. Supermarkets, for example, calculate weekly sales per square foot, whereas department stores and apparel specialty stores use an annual figure. Sales per square foot may be based on gross space or selling space. Gross space includes all of the square footage in the store, including nonselling areas. Selling space excludes all nonselling areas in the computation of sales per square foot. Selling space is usually defined as the total floor space devoted to selling activities, including aisles, fitting rooms, and stock rooms immediately adjacent to the selling department. Space next to stairways, elevators, escalators, and store entrances is excluded from the departmental selling area. In addition, workrooms and remote stock rooms are not considered part of the selling area. Sales per square foot are determined by dividing net sales by the appropriate number of square feet of space. Sales per square foot of gross space are based on total space, while sales per square foot of selling space are based on selling space. Sales per Square Foot of Gross Space ⴝ Net Sales ⴜ Square Feet of Space in Store Sales per Square Foot of Selling Space ⴝ Net Sales ⴜ Square Feet of Selling Space

Example 3-23 Last year, a store had sales of $23,994,000. If it has 86,000 square feet of selling space, what were the store’s sales per square foot for last year? Solution: Sales per Square Foot = Net Sales , Square Feet of Selling Space = $23,994,000 , 86,000 = $279

It is important to remember that an increase in sales per square foot from year to year does not necessarily indicate that real productivity has increased. Inflation will cause sales per square foot to rise artificially.

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63

To ­measure true changes in space productivity, inventory price indexes must be considered in evaluating increases in sales per square foot.

Sales per Square Foot as a Planning Measure An important use of sales per square foot data is in determining space requirements and planning sales. The sales productivity method of space allocation is a method of allocating space whereby the space to be ­allocated to a department or a merchandise category is based on sales the product has achieved in the past on a square foot basis. A store planner can estimate the amount of space needed to support a planned sales volume by using available sales per square foot data. When opening a new store, the store planner can project sales figures for the total store or a department by using the experience of other stores in the chain that are operating in similar locations. To estimate the amount of space needed to support a planned sales volume, divide the planned sales volume by the expected sales per square foot. Amount of Space  Sales Volume  Sales per Square Foot

Example 3-24 If the sales per square foot in the handbag department in a single unit of a chain store averages $280 annually and the annual sales for a new department are planned at $252,000, what amount of space should be allocated to the new department? Solution: Amount of Space = Sales Volume , Sales per Square Foot = $252,000 , $280 = 900 square feet A store planner can also use sales per square foot data to estimate sales for a store or department. If the square footage allocated for a new department is known and the average sales per square foot for the same department in other units of the store is known, sales for the new location can be estimated by multiplying the amount of space by the expected sales per square foot. It must be remembered, however, that such estimates are only rough approximations based on the assumption that the new store is similar to other company sites. Store planners must also consider factors such as the demographics of potential customers, the geographical location of the store, and the nature of the competition in the area. Still, estimates based on sales per square foot can ­provide merchants useful data for further analysis. Estimated sales are calculated by multiplying the amount of space in the store in square footage by the estimated sales per square foot. Estimated Sales  Square Footage of Space : Sales per Square Foot

Example 3-25 If 900 square feet of space in a new store has been allocated to the handbag department and the average sales per square foot for this department in other units of the store is $280, what annual sales volume would be expected? Solution: Estimated Sales = Amount of Square Footage * Sales per Square Foot = 900 * $280 = $252,000

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Sales per Linear Foot of Shelf Space A productivity or efficiency measure similar to sales per square foot is sales per linear foot of shelf space. This measure relates sales to the number of linear feet of shelf space used by a department, merchandise category, or brand. Supermarkets, drugstores, and discount stores use sales per linear foot of shelf space to determine a product’s allotment of space and placement. In analyzing sales of different brands, a retailer may decide to increase the shelf space for a brand that has higher sales per linear-foot figure. To determine sales per linear foot of shelf space, divide sales by the linear feet of shelving devoted to the product. Sales per Linear Foot ⴝ $ Sales ⴜ Linear Feet of Shelving

Example 3-26 A store devotes 30 linear feet of shelving to hair spray. If sales per week for hair spray total $1,246, what are the sales per linear foot of shelving? Solution: Sales per Linear Foot = $ Sales , Linear Feet of Shelving = $1,246 , 30 = $41.53

Practice Problems • Exercise 3.4 1. An exclusive, upscale shopping mall reported annual sales of $672 million. If the mall had 500,000 square feet of selling space, what were its sales per square foot?

2. A moderate-priced 86,000-square-foot department store had annual sales per square foot of $279. Determine the store’s total sales.

3. A branch department store has a total of 220,000 square feet of space. Twelve percent of the total space is considered nonselling space. If net sales were $59,000,000 last year, determine the store’s sales per square foot of selling space.

4. The deli department in a supermarket had sales of $13,500 last week. If the department occupies 300 square feet of space, what were the department’s sales per square foot?

5. A specialty store averages sales of $589 per square foot. How many square feet of selling space would be needed to produce total annual sales of $1,201,560?

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6. A leather-goods chain was planning a new store. The research department estimated that a new store could achieve annual sales of $2,499,360. If the chain averaged annual sales per square foot of $820 in its newer stores, approximately how much selling space should be planned for the new store?

7. Quick Glamour, a beauty supply retailer, devotes 48 linear feet of shelving to premium shampoo. If sales per week for premium shampoos total $528, what are the sales per linear foot of shelving?

Inventory Productivity Common methods of measuring inventory productivity include stock turnover, gross margin, and gross margin return on inventory. Turnover, defined as total net sales divided by average inventory valued at retail prices, shows how rapidly inventory is sold, usually on an annual basis. (Turnover is discussed in greater length in Chapter 8.) Gross margin, the difference between net sales and cost of merchandise sold, provides another basic measure of inventory productivity. (Gross margin was previously discussed in this chapter.) Turnover and gross margin, although good measures of productivity, do not take into account the dollar amount invested in inventory. Gross margin return on inventory (GMROI) indicates whether an adequate gross margin is being earned compared to the investment in inventory required to generate those margin dollars. GMROI, calculated by dividing the dollar gross margin by the average inventory at cost, is stated as a ratio. Gross margin return on inventory best serves as tool for measuring the productivity of individual product categories. (GMROI is discussed in Chapter 7.) GMROI ⴝ Gross Margin $ ⴜ Average Inventory at Cost

Example 3-27 Calculate GMROI from the following data: Net Sales $550,110, Gross Margin 38%, average inventory at cost $66,180. Solution: a. Calculate Gross Margin $ Gross Margin $ = Net Sales * Gross Margin % = $550,110 * 38% = $209,041.80 b. Calculate GMROI GMROI = Gross Margin $ , Average Inventory at Cost = $209,041.80 , $66,180 = 3.16 = 3.16

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Practice Problems • Exercise 3.5 1. What is the GMROI if the average inventory value at cost is $86,222 and gross margin is $387,999?

2. Calculate GMROI if gross margin is 42%, net sales are $690,500, and average inventory at cost is $74,750.

3. Find GMROI if average inventory at cost is $6,500; gross margin is 39%; and net sales are $39,000.

4. Determine GMROI if net sales are $498,000; cost of merchandise sold is $258,000; and average inventory at cost is $48,000.

Definitions Definitions

Commission – A method of compensation in which a salesperson is paid a percentage of his or her sales.

Contribution or Controllable Margin – The amount remaining after direct expenses are subtracted from gross margin. Direct Expenses – Expenses that specifically relate to the operation of a selling department and that would be eliminated if that department were eliminated. Full-Time Employee – A worker who is employed on a year-round basis and who works a full workweek, generally 35–40 hours per week. Full-Time Equivalent Employees – The number of hours worked by part-time employees divided by the number of hours considered to be a full-time workweek. Gross Margin or Gross Profit – Difference between net sales and total cost of merchandise sold. Gross Margin Return on Investment (GMROI) – A measure of inventory profitability that relates a gross margin to the cost of the inventory.

Loss – Result when operating expenses exceed gross margin. Margins – The results when two or more basic skeletal statement factors interact. Net Sales (also called Sales Volume, Sales Productivity, or Operating Income) – Sales after deductions have been made for customer returns and allowances. Operating Profit – Gross margin less operating expenses. Sales per Employee Hour – The relationship between sales for a period of time and the number of hours employees have worked during that period. Sales per Full-Time Employee Equivalent – The relationship between sales for a period of time and the number of full-time equivalent employees who worked during that period. Sales per Linear Foot of Shelf Space – The relationship between sales and the number of linear feet of shelf space used by a department, merchandise category, or brand.

Gross Sales – Total sales before customer returns and allowances have been deducted.

Sales per Square Foot of Selling Space – A ratio that reflects the sales volume productivity of a retailer’s selling space. Found by dividing net sales by square feet of selling space in store.

Indirect Expenses – Expenses that do not relate to specific selling departments.

Sales per Transaction – The relationship of dollar gross sales to the number of transactions. Profitability

67

Sales Productivity Method of Space Allocation – Method of allocating space whereby the space to be allocated to a department or merchandise category is based on sales the product has achieved in the past on a square-foot basis. Selling Space – The total floor space devoted to selling activities, including aisles, fitting rooms, and stock rooms adjacent to the selling department. Sales Transaction – The processing of one sale.

Selling Cost Percent – Relationship between gross wages and net sales for a salesperson, department, store, or other retail format. Skeletal Profit-and-Loss Statement (Operating Statement or Income Statement) – Presentation of figures summarizing income, cost of merchandise sold, and expenses for a specific period, usually a month, season, or year. Units per Transaction – A reflection of sales productivity whereby gross units purchased are divided by the number of transactions.

Summary Problems Chapter 3 • Summary Problems

1. Construct a skeletal profit-and-loss statement. Calculate profit or loss percent. Cross out the incorrect word (profit/loss). Net sales

$561,800

Cost of merchandise sold

275,280

Expenses

253,936

2. Construct a skeletal profit-and-loss statement. Calculate profit or loss percent. Cross out the incorrect word (profit/loss). Gross sales Customer returns

$341,420 29,870

Cost of merchandise sold

161,570

Expenses

138,140

3. Set up a skeletal profit-and-loss statement with the following figures: Net sales Cost of merchandise sold Profit

$1,560,800 753,860 76,480

4. Set up a skeletal profit-and-loss statement with the following figures: Gross sales

68

$136,780

Customer returns

12,960

Cost of merchandise sold

59,680

Expenses

57,403

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5. Set up a skeletal profit-and-loss statement with the following figures: Cost of merchandise sold Expenses

51.30% $317,820

Profit

4.65%

6. Determine the figures necessary to complete a skeletal profit-and-loss statement with the following figures: Net sales

$470,720

Gross margin

43.62%

Loss

2.30%

7. Set up a skeletal profit-and-loss statement with the following figures: Gross margin

$119,760

Expenses

41.20%

Profit

2.60%

8. Determine (a) net sales and (b) customer return percent for the handbag department when the following transactions occurred: Sales

Returns

$69.00

175.00

$69.00

85.00

69.00

28.00

110.00

36.00

36.00

98.00 50.00 140.00

9. The bath shop buyer anticipates that he can sell 150 units priced at $4.95 or 90 units priced at $7.95. Which retail price will result in larger total dollar sales?

10. An off-price specialty store chain reported that sales dropped to $338.4 million from $374.7 million, reflecting the closure of 25 stores in the year. What was the percent decrease?

11. Neiman-Marcus Direct reported sales of $363.8 million for fiscal year 2000, an increase of 13.1% over the previous year. What did the sales total in fiscal year 1999?

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12. Calculate gross sales if net sales are $167,800 and customer returns are 7.8%.

13. Determine customer return percent when gross sales are $138,300 and net sales are $127,430.

14. For the month of June, the sportswear department has planned to have net sales of $260,000. The selling cost is not to exceed 8.2%. How much can be spent on sales personnel?

15. A salesperson on commission earns $8.50 per hour, plus 2% commission on sales. Last week, she worked 38 hours and had net sales of $3,671. Calculate (a) selling cost percent and (b) average earnings per hour.

16. Calculate the (a) earning for each sales person and (b) selling cost percent for the entire department for which the following information is given: Salesperson

Gross Sales ($)

Customer Returns and Allowances ($)

Basis for Earnings

A

5,876

528

6% commission

Hours 38

B

4,935

440

6% commission

38

C

3,810

404

$7.75>hr + 2%

28

D

2,340

143

$7.75>hr + 2%

20

E

2,570

236

$7.15/hr

20

17. Last year, a department had net sales of $10,640 with a selling cost of 10.2%. The hourly wage rate for employees has been increased and is now $8.15 per hour. If sales are expected to increase 8% this year, how many hours of sales assistance can be provided and still have the department maintain a selling cost of 10.2%?

18. The average sale in a department store was $25.76 during a month when the store processed 21,426 customers. What were the store’s total sales for the month?

19. According to payroll records, 38 employees worked during the past week. Of these employees, 22 were full timers who worked a regular 40-hour week. Part-time employees worked a total of 480 hours, and sales for the week were $68,000. What were the sales per full-time employee equivalent?

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20. If a store uses a 35-hour workweek, determine the sales per full-time employee equivalent based on the following information: The store has 8 full-time employees and 5 part-time employees working an average of 21 hours each and generating total sales of $30,195.

21. Determine the average sale per transaction if gross sales for the month were $38,600 on 205 transactions.

22. The average sale in a discount department store was $23.45 during a week when the store processed 29,200 customers. What were the store’s total sales for the week?

23. Eight employees worked in the gift department. Three worked a full-time, 36-hour week; five worked part time, averaging 22 hours each. If departmental sales for the week were $35,000, what were the sales per full-time employee equivalent?

24. A large apparel chain posted sales of $13.7 billion for the year on 13.8 million square feet of retail space. What were the chain’s sales per square foot?

25. A branch department store has a total of 200,000 square feet of space. If 10% of the total space is considered nonselling space, what was the store’s sales per square foot of selling space if total sales last year were $36,900,000?

26. The Asian food section in a supermarket had sales of $3,500 last week. If the Asian food products occupy 200 linear feet of selling space, what was the department’s Asian food sales per linear foot for the week?

27. An apparel specialty chain announced the opening of a four-level, 22,000-square-foot flagship store in New York City. The store’s first-year volume was projected to be $14 million. What amount of sales per square feet was planned?

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28. Last year, the women’s hosiery department occupied 1,000 square feet and had sales of $129,000. If sales stay the same this year, what reduction in space would bring the store’s sales per square foot in line with the industry average of $159 per square foot?

29. The manager of a specialty chain store was concerned that the store’s sales per square foot of $219 was below the company average of $245. If the store had 3,600 square feet of space, what percentage increase in sales would be needed to bring sales up to the company average?

30. The manager of Contemporary Casuals was trying to determine if the gross margin return on investment had improved from last year. Last year the average inventory at cost was $61,600 while this year it was $62,900. Last year net sales were $280,779 and this year they improved to $281,444. The gross margin percent for last year was 52.00% and this year it was 52.50%. Calculate the GMROI for this year and last year and determine if the GMROI has improved.

Case Study 1 How Can the Department Increase Profit? Bobbie Moore, M.B.A Texas State University-San Marcos Channing has been working as an intern for a local department store for the last four weeks. Part of her internship requires her to complete a special project assigned by her ­internship supervisor. Channing has a meeting with her i­nternship supervisor, Karen, who is the department manager of ­contemporary sportswear. Karen informs Channing that she has been challenged by the store manager to increase the profit of the contemporary sportswear department and she would like Channing to take this on as her special project. Channing will be required to present a profit improvement strategy to the executive store management team in two weeks.

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Karen provides Channing with some information she feels will impact her profit improvement strategy. She informs ­Channing that sales in the department last month had a decrease to that of last year. She is concerned that a new store will be opening in the area that will be carrying some of the same brands that are currently being sold in the ­department and feels this may have a negative impact on sales for the ­following month. However, Karen received some exciting news from the buying office informing her that next week they will be receiving two new vendors that will be exclusive to their department store.

hard to find the right size for a customer in the contemporary department due to the racks not being sized properly. In addition, they report that the visuals look great in the department, but oftentimes the visual associates display items that they have very few units left on the floor. This frustrates customers and provides additional work for associates as they try to get the item removed from the mannequin for the customer. With the information provided by Karen and the associates in the department, Channing is ready to work on her profit improvement strategy. Karen provides the following data for Channing to use in her analysis:

Channing has also made some observations while working in the contemporary department over the past couple of weeks. During the week, employees are standing around when the store opens with nothing to do. On the weekends, the staffing seems to be light, and, oftentimes customers are looking for associates to open the fitting rooms for them or find additional sizes. In addition, Channing notices that she processes several customer returns on a daily basis, which negatively impacts net sales. Channing decides to solicit feedback from the contemporary department associates to get some information about the customers. The associates tell Channing that it is often

Department Store - Contemoporary Department July Results TY $ Gross Sales Customer Returns

LY %

$110,000.00

$

%

$115,000.00

$ 4,400.00

4%

$2,300.00

2%

$105,600.00

100%

$112,700.00

100%

Cost of Merchandise Sold

$47,520.00

45%

$50,715.00

45%

Gross Margin

$58,080.00

55%

$61,985.00

55%

Expenses

$52,800.00

50%

$50,715.00

45%

$5,280.00

5%

$11,270.00

10%

Net Sales

Profit

DISCUSSION QUESTIONS FOR CASE STUDY 1

1. Using the information provided by Karen, calculate (a) net sales for July this year (TY) vs. July last year (LY) and (b) customer return percent for July TY vs. LY. Has the percent increased or decreased? How will this affect the net sales and profitability of the contemporary department?

2. Set up a skeletal profit-and-loss statement with the above data.

Calculate the net sales results TY compared to LY. Does the department have an increase or decrease? What could have caused the change in sales? Provide three strategies Channing can use in her presentation to increase sales.

4. From the profit-and-loss statement in question 2, what is the profit percent for (a) TY and (b) LY? Provide three strategies Channing can use in her presentation to increase profit percent.

3. Using the formula from Chapter 2 % increase/decrease = (This year - Last year) , Last Year.

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Case Study 2 Measuring Corporate Social Responsibility through P&L Statement: Tensions between Profits and Sustainability for Online vs. Brick-and-Mortar Stores? Gail Baugh, M.A. San Francisco State University and Fashion Institute of Design and Merchandising, San Francisco Connie Ulasewicz San Francisco State University In the twenty-first century, corporate social responsibility (CSR) is a term well used and a process that is expected for established organizations to follow. Defined by the Harvard University as, “how companies manage their economic, social, and environmental impacts as well as their relationships in all key spheres of influence: The workplace, the marketplace, the supply chain, the community, and the public policy realm” (Corporate Social Responsibility Initiative), it is often challenging for organizations to choose and integrate the appropriate socially responsible initiatives and maintain their profitability. Companies consume large amounts of energy through lighting, heating and cooling, packaging, and shipping methods. In this case study, an iconic retail brand will be investigated to gain a better understanding of their CSR goals and challenges and the choices they make to measure and maintain their profitability. Macy’s Inc., established in 1858, operates Macy’s and Bloomingdales brands with fiscal 2010 sales of $25.0 billion, and over 840 stores in 45 states, along with the Macys.com and Bloomingdales.com Web sites (Macy’s annual report, 2010). Macy’s Inc. strives to maintain their profitability, while developing and measuring their social responsibility and keeping the customer at the center of their decisions. Retailing the right fashion, at the right price, at the right time, and in the right quantity is essential for this organization. Another practice currently intertwined with retailing fashion and maintaining profitability and CSR is sustainability. Retail sustainability refers to the interconnectivity of the people, processes, and environment that produce, promote, sell, and distribute goods (Hethorn & Ulasewicz, 2008). Fashion and retail are ripe for sustainable actions that can create efficiencies, while increasing profits, and being good for the planet. With our current global economic challenges and drive for CSR, sustainable

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practices must be planned into a business model so that they are part of a fixed expense structure. As a leading national retailer, Macy’s is committed to developing business practices that are sustainable and measurable. They are redefining their profit and loss (P&L) so that their business reflects their values. On their Web site (http://www.macysinc.com/aboutus/sustainability/five-pointaction-plan.aspx), they outline a five-point action plan of how they will contribute to a more sustainable environment, “whenever possible and sensible within the context of their business requirements.” Briefly described here, the action plan includes the following: 1. We will be more aggressive in our drive to eliminate wasteful behavior 2. We will reduce our use of scarce resources in a meaningful way 3. We will pursue the most environmentally friendly solution 4. We will take a comprehensive approach to sustainability, involving everyone around us 5. We will measure what we do and strive toward quantifiable goals. Macy’s Inc. is challenged with the same basic four expenses to maintain and grow their business in a sustainable manner as their competitors: labor, rent, utilities, and promotional activities. Several tangible actions (Macy’s annual report, 2010) they have taken include the following: • Installed solar power systems at 40 Macy’s and Bloomingdales. • Increased the proportion of recycled or certified paper used in marketing materials to 80% in shopping bags and 89% in gift boxes.

• Installed 130,000 LED light bulbs and cut energy consumption. • Substituted biodegradable packing materials for the foam “peanuts” in shipping products bought online. • Initiated recycling programs diverting more than 66 tons of waste from landfill. Online sales are potentially one method to grow a business while increasing sustainable practices and profitability. Online sales for Macy’s and Bloomingdales have risen by 20 percent or more in each of the past three years (Macy’s annual report, 2010). The question is, through a sustainable lens, how are labor, rent, utilities, and promotional activities different for an online vs. brick-and-mortar Macy’s? Does this retail method create efficiencies that are good for the planet and the bottom line? One simple difference between an online and brick-andmortar store is the use of hangers to display merchandise. Macy’s uses nearly, 300 million hangers in its stores each year (Macy’s Inc. Announces New Sustainability Actions). In the fall of 2011, they will be switching from their clear hangers manufactured from new petroleum-based resins to black hangers manufactured using recycled plastic materials. Clearly, this is a sustainable initiative. Yet, are hangers used for their online stores? Macy’s has also moved forward with a new organizational format for Macys.com with a separate store division, buying team, and divisional structure. Included in this case study are two profit-and-loss statements that show estimated sales and expenses for the online store as it develops. Without the expense of operating a brick-and-mortar store, which requires

hiring and training sales personnel and incurring physical store operating expenses, the Web-based store has the potential for higher profits than a physical store. With today’s accelerating technology that is utilized in social networking media, mobile shopping, 3-D imaging, and smart phone applications, the online retailer now has a greater potential to reach their market than ever before. Therefore, comparing a brick-and-mortar store operating statement with that of a Web-based store is a useful endeavor to further understand Macy’s CSR challenges and the choices they make to measure and maintain their profitability. What follows is an abbreviated profit-and-loss statement containing estimated numbers for your thought and reflection.

SOURCES Corporate Social Responsibility Initiative. Retrieved from http:// www.hks.harvard.edu/m-rcbg/CSRI/init_define.html Hethorn, J. & Ulasewicz, C. (2008). Sustainable Fashion: Why Now? New York: Fairchild Books. Macy’s Annual Report, Developing a Culture of Growth, Macy’s Inc., 2011. Macy’s Inc. Announces New Sustainability Actions. Retrieved from http://www.macysinc.com/aboutus/sustainability/ 2011-sustainability-actions.pdf Sustainability at Macy’s Inc: A Five-Point Action Plan. Retrieved from http://www.macysinc.com/aboutus/sustainability/ five-point-action-plan.aspx

BRICK & MORTAR STORE CHAIN

WEB-BASED STORE

$25,003.0 billion

$25.0 million

1%

3.5%

Cost of goods sold

59.3% of net sales

59.3% of net sales

Gross margin

$10,179.0 billion (40.7% of net sales)

$10.2 million (40.7% of net sales)

$8,206.0 billion (32.8% of net sales)

$5.3 million (21.2% of net sales)

Net sales Customer return

Expenses (see breakdown below)

BREAKDOWN OF EXPENSES (% of total expenses) Selling costs/labor

48%

Store rent

20%

1,641.2

14.9%

0.8

Store operation

20%

1,641.2

12.5%

0.7

8%

656.5

28.9%

1.5

Promotion

$3,938.9 billion

23.3%

$1.2 million

(Continued)

Profitability

75

(Continued)

BRICK & MORTAR STORE CHAIN Administrative

4% 100%

328.2 $8,206.0 billion

Expenses to net sales 32.8%

WEB-BASED STORE 20.4%

1.1

100%

$5.3 million

Expenses to net sales = 21.2.%

CORPORATE SOCIAL RESPONSIBILITY (CSR) NA

2% net sales

0.5 million

NEW EXP TOTAL: $5.8 million (New Expenses to net sales 23.2%) Net profit

$1,973 billion (7.9% of net sales)

DISCUSSION QUESTIONS FOR CASE STUDY 2

1. Based on the profit-and-loss information above, which of the two is the best business to open? List and explain two reasons based on expense information.

2. For both stores, where are opportunities in the profit-andloss statement to increase profit, if reduced packaging is implemented? Consider both brick-and-mortar and online stores. List and explain at least two reasons.

3. What is the net profit of the brick-and-mortar store if it uses a separate line item for corporate social responsibility (CSR), as defined here as of 2% of net sales?

$4.4 million (17.6% of net sales)

4. The brick-and-mortar store has decided to use mobile shopping, online coupons, and smart phone applications instead of paper-based print promotional efforts to boost its sales at no additional cost. This new promotional strategy will reduce their selling cost/labor by 5% of net sales, while reducing the use of paper. What will be the resulting new net profit?

5. How can a brick-and-mortar store build net sales or plan for expenses that are related to conserving resources and reducing waste? Be specific with your suggestions, listing and explaining at least three ways a physical store can take action to influence their expenses.

Case Study 3 Contemplating New Directions at “The Mad Hatteras” Holly Lentz, Ph.D. West Virginia University Lauren Asbury is the owner of an upscale women’s boutique, The Mad Hatteras, in Wilmington, NC. She worked at The Mad Hatteras throughout college and then purchased the boutique four years ago when the previous owner retired. She has spent a lot of time learning about and understanding the current customers in her shop, listening to their wants and concerns, as well as staying vigilant to the current costs and expenses of running a business in the resort town. The

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boutique has been very successful over the past three years, which means that Lauren is looking to expand. Last year, gross sales were $220,000, with customer returns totaling 8.7% of gross sales. Expenses in the current space, which is 1500 square feet, were 42%. The current cost of merchandise sold is 48% for the boutique. Given the situation, she is thinking about two different options. Lauren’s first option is to carry a sustainable,

eco-friendly apparel line for men, women, and children. The product mix offers mainly active wear, but has recently expanded to include swim wear, and a performance line. Lauren is passionate about sustainability in her community and feels very strongly about buying eco-friendly products. Many of The Mad Hatteras’s customers are asking for the popular sustainable, eco-friendly products, as no other shops in town carry the line and the vendor has done a great job of promoting the line via social media. In order to carry the line, the vendor asked Lauren to expand the current space by 500 square feet for a dedicated “shop-in-shop” concept. Lauren would also have to invest approximately $10,000 in fixtures and marketing and promotion materials. If Lauren were to choose this option, she would have to take over an adjacent space. The cost of merchandise sold would decrease to 44.5%. However, her expenses would increase by 2%. She expects sales to increase to $270,000 and customer returns to remain the same. The second option she is considering is to begin expanding her product offerings for women to begin carrying shoes and other accessories. Most of the products that she currently

carries are dresses for social occasions and professional dress for women. Choosing the second option would mean that The Mad Hatteras could stay in the current space with expenses staying stable, but the cost of merchandise sold would increase to 49%. With this option, the sales are expected to increase to $252,000 and she assumes that customer returns will increase by 1.5%. Lauren would like to be the first in the area to carry the line, but must also make prudent decisions for her business. DISCUSSION QUESTIONS FOR CASE STUDY 3

1. Develop a skeletal statement for the current and new options.

2. Calculate sales per square foot for all three scenarios (the current state and for the two options.

3. What points would you raise with Lauren to help her make the appropriate decision?

4. What recommendations would you make to Lauren if she were to choose the eco-friendly line?

5. What choice would you make? Explain your answer fully.

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COST of

MERCHANDISE SOLD

OBJECTIVES • To understand the importance of negotiating with vendors for the lowest prices and best terms of sale and of developing win–win relationships with vendors. • To define and calculate different types of discounts offered to the retailer by the vendor, including quantity, trade, seasonal, and cash discounts. • To calculate the period during which discounts can be taken when different types of dating are offered. • To understand how allowances and rebates reduce the cost of the merchandise. • To understand issues surrounding the transportation of goods and its effects on the cost of merchandise. • To understand how factors and back offices assist retailers. • To understand that negotiating vendor services can assist in improving the retailer’s profit margin. KEY POINTS • The amount the retailer actually pays for merchandise is affected by several considerations, in addition to the cost of the merchandise as quoted by the vendor. • Discounts, allowances, and transportation charges affect the total cost of merchandise. • Although there may be other aspects that the vendor and retail buyer negotiate, “terms of sale” refers specifically to cash discounts and dating.

4 79

Career Corner Vice President of Apparel Academy Sports + Outdoors

merchandising mathematics and all crucial to building and managing a retail business.

Description of Job Responsibilities

Career Path

As the Vice President of Apparel, I oversee all buying aspects of the apparel categories. This encompasses both athletic and outdoor apparel. I am involved in all buying processes ranging across financial planning, assortments, product selection for national brands, product development for our private label brands, vendor relations, training and development, marketing, and in-store merchandising. All of these Margaret Bowman/Academy Sports  aspects make up the imporOutdoors tant stages of the product life cycle and our main goal is always to drive sales. My team includes divisional merchandise managers, buyers, and assistant buyers.

My qualifications include a degree in Textiles from the University of Texas at Austin, along with experience in all aspects of retail. After my college internship, I became a department manager for a large department store. I moved to the training department as a manager for numerous stores in one region. I then advanced to personnel manager/store manager of one of our largest stores in our chain. I later was promoted to the corporate level as an assistant buyer, buyer, then divisional merchandise manager, marketing manager, and to the position I have now as Vice President of Apparel. I have been in the field for 27 years and have spent 13 of those years with Academy Sports + Outdoors. I started with my company when it was smaller, which allowed me to grow with my positions as the company grew. I always say, “I didn’t pick retail, retail picked me” and I wouldn’t have it any other way.

Margaret Bowman

Relevance of Merchandising Mathematics Financial planning is the cornerstone of any retail business. Planning strategically comes from a strong understanding of your customer and knowledge of the key performance indicators that make up a healthy retail plan. Sales, margin, turn, and GMROI are all important metrics taught in

Advice for Students Interested in Merchandising Careers You have to enjoy working with customers. You must be willing to listen to them and understand their needs. You have to have strong analytical and problem-solving skills. Communication skills are a must. You must be able to sell your ideas. You don’t just need to sell your ideas to vendors; you also need to sell your ideas to your peers, superiors, and fellow associates. You need to be willing to be aggressive and competitive enough to believe in yourself and seek opportunities to grow sales. You must be able to stand above and beyond in your work environment. Passion is important in retail; be passionate about your customer.

As discussed in Chapter 3, the cost of merchandise sold is a major component in determining a firm’s operating profit. Retailers seek to purchase merchandise from vendors at the lowest possible net cost. Negotiating the best prices and terms of sale from vendors improves the retailer’s profit margin and enables retailers to offer their customers lower prices and/or better service. A vendor, who is also referred to as a resource or supplier, is a person or firm, such as a manufacturer, importer, or wholesaler, from whom a retailer purchases goods. Retailers should be aware of all considerations that will assist them in negotiating with vendors for the best prices. Even when wholesale prices, the amount the vendor charges for goods, are firmly established by a vendor, the retailer may be able to reduce the net cost of the merchandise by negotiating for discounts, transportation, allowances, rebates, and services. Special buying situations, such as promotional, specification, and private-label buying, may also contribute to a greater profit for the retailer.

Negotiations Once the retailer has completed the planning process, identified the suppliers, and selected the merchandise, the retailer must negotiate the wholesale prices of goods from vendors. Negotiating the purchase of merchandise is an important part of the buying process. The retailer and vendor must not only agree on the wholesale price, but also negotiate the terms of sale, transportation arrangements, services, and stipulations to be included in the purchase contract. 80

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In many retail organizations, the buyer is responsible for negotiating the cost of the merchandise. In more complex purchases, the negotiating process may include technical experts, high-level management officers, and others from the retail firm. The buyer acts as the retailer’s agent in dealing with vendors and has the responsibility to represent the retailer in an ethical manner. It is important for the buyer to develop good relations with vendors. A profitable business in the long run can be best achieved when a retailer and its suppliers have a feeling of mutual respect. Both the retailer and vendor should be honest and ethical in their dealings with one another. The buyer who knows the market and understands the cost of producing goods is in the best position to negotiate prices. Buyers should be familiar with the availability of goods, prices offered by vendors’ competitors, and consumer demand. When purchasing goods from overseas, retailers should be familiar with international regulations before finalizing the cost of the merchandise. In negotiating the final cost of the merchandise, buyers should be familiar with legislation that regulates competition and affects pricing policies. Of importance in domestic trade is the Robinson–Patman Act of 1936, which was designed to limit price discrimination and protect small businesses. The act prohibits vendors from providing excessive quantity discounts to large-volume retailers. It forbids a vendor engaging in interstate commerce from selling to similar retailers at different prices if both sales involve products of the same quality and grade and if the resulting price difference serves to substantially lessen competition, create a monopoly, or prevent competition. Retailers and vendors must work together to negotiate contracts that work best for both parties. Vendors can offer lower prices when the method of buying reduces the vendor’s cost of doing business, when prices are reduced to meet a competitor’s lower price, or when the price is reduced on goods that are obsolete or becoming obsolete. Buyers should be familiar with the prices of merchandise and the terms involved during the purchasing of goods. The vendor will usually pass the overhead cost savings on to the retailer, where it is then passed on to the end consumer. Retailers should seek to purchase merchandise at the lowest possible net cost. Exclusive, specification, and private-label buying offer other means of reducing costs in competitive markets. As discussed in Chapter 1, private-label goods are merchandise that carry the retailer’s label and are sold exclusively by the retailer. Sometimes a buyer will observe a customer product demand and is not able to locate the merchandise from market vendors. Thus, the buyer is able to work with vendors or in-house product developers to design merchandise using the company’s private label to meet that demand. Privatelabel brands have been steadily increasing their market share over the years because they offer an opportunity for buyers to negotiate much lower costs, and therefore gain higher markups, than with national or name brands. The cost of national or name brand merchandise often includes the cost of the name itself because of royalties and licensing fees along with the associated promotional costs, but with private labels, those costs are eliminated or assumed by the retailer. Since private-label buyers often have input on the design and materials that are used to make the merchandise, they have the ability to choose more cost-efficient styles, fabrics, and trims, helping to further lower the cost of the merchandise and at the same time customize it for their market. Developing private-label brands with vendors helps the retailer in creating high-gross margin merchandise. Even after the buyer and seller agree on a wholesale price, this quoted cost is rarely the net cost or exact amount the retailer pays for the merchandise. The extent to which a buyer can negotiate the cost of merchandise varies. There may be discounts that reduce the cost. In addition, the retailer generally pays transportation charges associated with getting the merchandise to the store or the store’s distribution center. These considerations— discounts, allowances, and transportation—should be negotiated if at all possible, in order to assist the buyer in improving the profit margin for the retail firm. The final costs are documented in an invoice, the bill that is associated with a shipment of merchandise. Cost of Merchandise Sold

81

Discounts A discount is a reduction in price allowed by the vendor. Any individual or firm from whom the retailer buys merchandise is referred to as a vendor. The vendor may be a manufacturer, a wholesaler, or even another retailer. Many discounts have become standardized through the years. Vendors anticipate such discounts and quote prices accordingly. Retail buyers should attempt to negotiate for the best possible discounts, especially if the discount on desired merchandise is lower than discounts offered by sellers of similar merchandise. It is important for both buyers and vendors to be proficient at negotiating, since both are seeking to obtain the best price for their companies. There are numerous reasons for granting discounts of all kinds, including quantity, trade, seasonal, and cash discounts.

Quantity (Patronage) Discounts Quantity discounts are discounts allowed when a large specified quantity is purchased. The amount of the discount usually increases as the quantity purchased increases. A quantity discount is also called a “patronage” discount, because it encourages the buyer to concentrate purchases or continue to patronize the same vendor. A quantity discount is allowed when a given quantity is purchased. Depending on custom and practice within individual industries, such a discount is offered either when a stated quantity is purchased or for accumulated purchases over a specific period. Quantity discounts are seldom available with apparel; however, they are sometimes used in the home-furnishings industry. The Robinson–Patman Act, which outlaws price discrimination in interstate commerce, does not forbid quantity discounts when the discounts are used to pass on savings that result from manufacturing, selling, and/or packaging larger quantities. When offered by a vendor, a quantity discount must be made available to all retailers who qualify. A quantity discount is deducted prior to any other type of discount and is deducted regardless of when the invoice is paid.

Example 4-1 A carpet supplier’s discount schedule allows a 0.5% discount on orders for 600 to 1,000 square yards, a 1% discount on orders for 1,001 to 2,000 square yards, and a 2% discount on orders for more than 2,000 square yards. A flooring store ordered 759 square yards of carpeting costing $16.90 per square yard. After the discount was deducted, how much was remitted to the supplier? Solution: 759 * $16.90 = $12,827.10 Less 0.5% discount ⴝ $12,827.10 ⴚ $64.14 ⴝ $12,762.96

Trade (Functional) Discounts Trade discounts are a percent deducted from the list price of the vendor. The list price is the vendor’s suggested retail price. The billed cost represents the resultant figure after applying the trade discounts to the list price. List price less a percent or series of percents is a customary way of quoting cost for some types of merchandise. The list price may, but does not have to, be the same as the retail price. Today, list prices frequently are higher than retail prices. The list price may be set higher than the typical retail price to make customers think that they are receiving a special value.

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Quoting a discount from an established list price allows a vendor to adjust cost easily. This is an advantage to vendors who picture and describe merchandise in catalogs, such as furniture vendors. A price change can be made quickly by printing new price lists with a change in the discount. Trade discounts may be expressed as one of a “series” of discounts. For example, the cost may be quoted as “$4,800.00 less 40% and 15%,” or “40 and 15 off.” When two or more discounts are quoted in a series, each discount is deducted separately.

Example 4-2 A rug has a list price of $4,800.00 with discounts of 40% and 15%. What is the final cost of this rug? Solution: List price

$4,800.00

Less 40%

- 1,920.00 2,880.00

Less 15% Cost

- 432.00 $2,448.00

When a series of discounts is to be taken, the numbers in the series cannot be added together. Thus, separate discounts of 40% and 15% result in a different billed cost than does a single discount of 55%. (Try it to prove the difference.) There are several ways series discounts can be calculated. In addition to the “direct method” shown in the previous example, “complement” and “on-percent” methods may be used. Both of these methods use the complement of the discount. Study the next example.

Example 4-3 Find the billed cost of a vacuum cleaner that has a list price of $200 with discounts of 40% and 15%. Solution:

(Use one of the three ways shown.)

1. Direct method. With the direct method, each discount is taken individually and subtracted from the previous balance or preceding net amount. $200 less 40% = $200 - $80 = $120 $120 less 15% = $120 - $18 = $102, billed cost 2. Complement method. When the complement of the discount is used, it is not necessary to subtract the amount of the discount from the previous figure. The complement, which is 100% minus the discount %, is multiplied by the previous balance or preceding net amount. List price = $200 $200 * 60% (complement of 40% or 100% - 40%) = $120 $200 * 85% (complement of 15% or 100% - 15%) = $102, billed cost 3. On-percent method. The “on-percent” is calculated by multiplying the complements of the discounts. The billed cost is determined by multiplying the list price by the on-percent. With the on-percent method, a lower percent is better, since it will provide a lower billed cost. On-percent = 60% * 85% = 51% (60% is the complement of 40%) (85% is the complement of 15%) Billed cost ⴝ $200 : 51% ⴝ $102

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A trade discount is frequently a functional discount. When the amount of discount allowed depends on the “function” of the purchaser (e.g., an industrial user, a wholesaler, a retailer, or an interior designer), the discount is known as a functional discount. Industrial users and wholesalers get larger or additional discounts than retailers because they provide different services in the channel of distribution and generally purchase in much larger quantities. The services provided by middlemen such as wholesalers generally reduce the manufacturer’s cost of doing business. A retailer might receive a 30% discount; the wholesaler might receive discounts of 30% and 10%; the industrial user’s discounts might be 30%, 10%, and 5%.

Seasonal Discounts Seasonal discounts may be given to a retailer for ordering or accepting merchandise out of season. This reduction in price encourages retailers to place orders for merchandise ahead of the usual buying season, thereby allowing manufacturers to prepare more accurately for their upcoming merchandise production needs. Retailers must have storage space and available money to take advantage of seasonal discounts. Also, when accepting seasonal discounts, retailers must be able to predict their merchandise needs well in advance of the selling season.

Example 4-4 A vendor offered a 5% seasonal discount to a retailer for purchasing swimsuits in September. The buyer ordered 200 swimsuits that cost $45.00 each, to be shipped in October. The 5% seasonal discount is deducted. What amount is paid to the vendor? Solution: Total billed cost, 200 : $45 ⴝ $9,000 Less seasonal discount 9,000 - ($9,000 * 5%) = $9,000 - $450 Net cost = $8,550

Cash Discounts Cash discounts are a percent reduction from the quoted cost allowed for prompt payment of an invoice. A cash discount can be taken if the invoice is paid within a specified period. For many types of merchandise, the percent reduction is standard for regular-priced goods. The buyer of promotional merchandise (goods bought to be sold at a lower price for a special sale) may be offered a smaller discount than is normally associated with that type of merchandise. Anytime the buyer is quoted a discount less than the customary discount, the buyer may be able to negotiate for better terms. The cash discount percent is written on the retailer’s order form and specified on the vendor’s invoice. “Terms” refer to the cash discount and dating. Dating is the time limit for payment of the invoice. Terms of 8/10 mean an 8% cash discount can be taken if the invoice is paid within 10 days from the date of the invoice. The invoice date is usually the date that the merchandise is shipped. The cash discount is deducted after all other types of discounts have been deducted. The cash discount is taken on billed cost—the cost after quantity and/or trade discounts have been deducted, but before the cash discount is taken. Billed cost is shown on the vendor’s invoice and can also be referred to as gross cost. When a cash discount is the only discount allowed on merchandise, the quoted cost is the same as the billed cost.

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Example 4-5 The list price of a bottle of shampoo is $2.00 less 30% and 20%. A 3% cash discount may be taken if the invoice is paid within 10 days. What is the amount to be paid on an order for 5 dozen bottles when the cash discount is taken? (Remember: 5 dozen is equivalent to 60 units.) Solution: Total list price, 60 : $2.00 ⴝ $120.00 Less trade discounts: $120.00 less 30% = $84.00 $84.00 less 20% = $67.20, billed cost Less cash discount, $67.20 less 3% = $65.18, amount due

Example 4-6 The coat buyer ordered 18 raincoats that cost $39.00 each. An 8% cash discount is deducted. What amount is paid to the vendor? Solution: Total billed cost, 18 : $39 ⴝ $702 Less cash discount, $702 ⴚ ($702 : 8%) ⴝ $702 ⴚ $ 56.16 Net cost = $645.84 Technically, in order to receive an agreed-upon cash discount, the retailer must pay for the merchandise within the period specified. Large retailers now have a great deal of bargaining power and often extend the period during which they take the discount. This practice creates friction between the vendor and the retailer. A retail firm should plan its cash flow to be able to take advantage of cash discounts. In most instances, it is cheaper to borrow than lose cash discounts; however, when interest rates are high, this may not be the case. Retailers need to protect their credit reputations by paying bills on time. Although the buyer is responsible for negotiating the best terms and dating, the buyer rarely pays the bills. On the one hand, cash discounts act as a profit cushion for the retailer. The buyer usually determines retail price on the basis of billed cost (gross) of merchandise. When a cash discount is taken, the actual amount the retailer pays for the merchandise is reduced. The buyer cannot know for certain that cash discounts will be taken, since paying invoices is a responsibility of accounts payable and will depend on the cash available at the time the merchandise is received. On the other hand, cash discounts can be a profit cushion for the vendor. Vendors include the cost of cash discounts when establishing their wholesale prices. Thus, when the retailer pays after the cash discount period and does not receive a discount, the vendor has an increased profit. Today, most invoices are stated in net terms, meaning that a cash discount is not allowed. The entire billed cost, as shown on the invoice, is due by the date specified. Retailers keep separate totals for billed cost of merchandise, transportation (freight), and cash discounts. On the retailer’s operating statement, cash discounts are usually subtracted from gross cost of merchandise sold to determine net cost of merchandise sold. A few retail firms treat cash discounts as “other income earned” and add it to their operating profit; however, this procedure is not recommended by the National Retail Federation.

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Practice Problems • Exercise 4.1 1. The accessories buyer placed the following order for small leather goods: Quantity (dozen)

Item

List Price ($)

1 >4

Cell phone cases

22.50 each

2 >2

Billfolds

30.00 each

1

1 >6

I-pod holders

35.00 each

>4

Eyeglass cases

18.00 each

1

1

3

Total Cost of Items

The merchandise cost is list price less 40% and 15%. Calculate the billed cost for the entire group of items.

2. The carpet buyer placed an order for 1,260 square yards of carpet at $11.90 per square yard. A 2% cash discount is taken. On the basis of the following discount schedule, how much will be paid to the vendor? Quantity (yards)

Discount (%)

500–1,000

0.75

1,001–1,800

1.25

1,801–2,500

1.75

Over 2,500

2.00

3. A cash discount of 6% is allowed on an invoice for $1,654 dated September 16. If the cash discount is taken, how much will be remitted to the vendor?

4. A manufacturer offers the gift buyer a line of carved wooden items that have trade discounts of 30% and 20%. The buyer orders merchandise that has a total list price of $978. If a 2% cash discount is taken on this order, what will be the amount remitted?

5. As a stocking dealer, Johnson Brothers Furniture buys the Chrome Craft line of furniture for list less 30%, 20%, and 5%. If the invoice is paid within 15 days, a 2% cash discount is allowed. On the following order, how much should be remitted for all items if the cash discount is taken? Quantity

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Item

List Price ($)

3

215–100 tables

395.00 each

6

215–201 chairs

159.00 each

12

215–203 chairs

129.00 each

Total Cost of Items

6. Calculate the “on-percent” for the series discount in Problem 5.

7. A textile converter who specializes in drapery fabric sells to furniture stores with discounts of 30%, 20%, and 10%. Individual interior designers are allowed discounts of 30% and 20%. On an order with total list cost of $500, what is the difference in cost for a furniture store compared with an individual designer?

8. (a) From the buyer’s viewpoint, which is the better series of discounts for the buyer: 25%, 15%, and 10%; or 30%, 15%, and 5%? (b) Which would be the better series of discounts for the manufacturer?

9. A buyer for Sears is able to negotiate discounts of 30%, 10%, and 5%. The Collegiate Shop is able to negotiate only a 5% discount. What is the price that each will pay for an item listed at $500?

10. A buyer places an order totaling $5,460 from a vendor offering trade discounts of 30%, 10%, with a 3% cash discount if the bill is paid 10 days from the invoice date. If the buyer pays on time, how much should be remitted?

Dating “Dating” refers to the length of time the retailer has to pay the invoice and the time during which the cash discount can be taken. When a cash discount is allowed, two different dates are calculated. One date, known as the discount date, is the last day in the discount period; this is the last day on which the discount is allowed. The other date calculated is the net payment date, the last day for payment before the bill is overdue and interest might be added to the total cost. For example, on an invoice dated July 6 with terms 3/10, n/30, the discount date is July 16. The net payment date is August 5, exactly 30 days from July 6.

Cash on Delivery (COD) Occasionally, a retailer is not granted credit and must purchase merchandise on the basis of cash on delivery, or COD. A new store that does not have a credit rating, a store that is considered a poor credit risk, or a store purchasing internationally might be forced to pay for merchandise when delivered. [In particularly risky situations, cash before delivery (CBD) or cash with order (CWO) may be used, but these methods of payment are rare.] Cost of Merchandise Sold

87

Regular (Ordinary or Normal) Dating Regular dating (also known as ordinary or normal dating) is calculated from the date of the invoice, which is usually the date the merchandise is shipped. For example, terms of 3/10, n/30 mean that a 3% discount can be taken if the invoice is paid within 10 days. If it is not paid within 10 days, the complete, or net, amount is due 30 days from the date of the invoice. If the net period is not specified, it will be 30 days with regular dating.

Example 4-7 Calculate discount and net payment dates for an invoice dated October 15 with terms of 2/10, n/30. Solution: The last day on which the cash discount can be taken is October 25 (15 + 10 = 25). If not paid by October 25, the full amount is due within 30 days, or on November 14. October has 31 days, so days left in October (31 - 15) = 16. Net payment date (30 - 16 = 14) is November 14. The invoice is considered overdue if not paid by November 14.

Receipt of Goods (ROG) With ROG dating, the dating is calculated from the date the merchandise is received by the retailer, rather than from the date on the invoice. A retailer that is a far distance from the vendor’s shipping point or a retailer that selects a slow method of transportation might request ROG dating. When merchandise on an invoice dated March 5 is received on March 12 with terms of 2/10 ROG, the last day for the cash discount is March 22. The net payment date is an additional 20 days, April 11 in this instance, unless some other conditions are stipulated.

End-of-Month (EOM) With EOM dating, the discount date is calculated from the end of the month instead of the date of the invoice. In the apparel industries, 10/EOM is common dating. The last day on which the cash discount may be taken is the 10th of the month; thus, an invoice dated June 11 with terms of 8/10 EOM has a discount date of July 10 (10 days after the end of June). With EOM dating, the net period is an additional 20 days. With EOM dating, and only EOM dating, an invoice dated on or after the 26th of the month is considered to be dated the first of the following month. The last day for taking the cash discount on an invoice dated June 28 with terms of 8/10 EOM is August 10. The invoice is handled as though its date were July 1; therefore, the last day for taking the cash discount is August 10. With EOM dating, whether an invoice is dated the 25th or the 26th makes a great deal of difference in the cash discount date. For example, October 10 is the last day on which the cash discount is allowed on an invoice dated September 25 with EOM terms. However, if the invoice is dated September 26, only one day later, then November 10 is the last day for the cash discount.

Extra Dating (X-Dating) Extra dating extends credit for an additional period. For example, an invoice with terms of 3/10-30X has a cash discount period of 40 days (10 days plus an extra 30 equals 40 days). If the invoice is paid within the 40-day period, the retailer will receive a 3% discount. 88

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Example 4-8 On an invoice with terms of 3/10-60X and dated May 11, the cash discount period is 70 days (10 plus 60 equals 70). Thus, the cash discount can be taken through July 20. Solution: Days left in May (31 - 11) June has 30 days Total days at end of June

20 +30 50

Additional days needed 70 - 50 = 20 July 20 is the last day on which the cash discount is allowed. With X-dating, the net period ends after an additional 20 days. In Example 4-8, the last day for payment in full (no cash discount) would be August 9 (11 days left in July plus 9 extra, to equal 20).

Advanced Dating (as of) Advanced dating, or as of dating, refers to the same type of dating. The time for payment is calculated from some specified future date that is neither the date of the invoice nor the date the goods are received. Such an invoice might be dated June 12 with terms of 3/10, n/30 as of September 1. The last day for payment with cash discount deducted would be September 11; if the invoice is not paid by September 11, the entire amount is due by September 31. Many vendors no longer allow retailers to take cash discounts. This has come about because some retailers took extra days to pay and deducted cash discounts beyond the due dates. Furthermore, it is common for vendors to require new accounts to pay in advance until their credit is established.

Practice Problems • Exercise 4.2 1. A buyer receives an invoice for $500. Assuming that the buyer paid the invoice on time, use the following terms and calculate (a) the last day on which the cash discount is allowed (b) the amount to be remitted if the discount is taken

Invoice Date

Date Merchandise Is Received

Terms

a. February 6

February 11

3/10, n/30

b. August 18

August 29

3/10 ROG

c. July 10

July 15

8/10 EOM

d. October 15

October 20

6/10-30X

e. March 28

April 3

8/10 EOM

f. July 5

July 11

6/10-60X

g. December 3

December 7

1/10, n30

h. September 19

September 30

3/10 ROG

Cash Discount Date

$ Amount Due

(Continued)

Cost of Merchandise Sold

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(Continued)

Invoice Date

Date Merchandise Is Received

Terms

i. May 29

June 5

8/10 EOM

j. July 5

July 23

6/10 as of October 1

k. May 14

May 21

3/10 EOM

l. December 1

December 5

1/10, n/30

m. July 25

August 2

6/10 as of November 1

n. June 28

July 8

3/10-40X

o. January 18

January 24

6/10 ROG

Cash Discount Date

$ Amount Due

Allowances Allowances are given by a supplier to a retailer to encourage business and promote increased sales volume in some way. Allowances compensate the retailer for part of the cost of the product, as well as for promoting and merchandising it. The retailer and vendor negotiate the extent and conditions of the allowance. Allowances may be granted for the performance of a variety of merchandising and promotional functions. A trade allowance from a vendor is provided as compensation to the store for stocking or displaying merchandise. An incentive for retailers and vendors to work together, trade allowances are typically negotiated during market weeks. Buying allowances reduce the price of merchandise for a specific, limited period. The price reduction may be either a dollar amount or a percentage off the invoice price—an off-invoice allowance. Buying allowances can also be extra amounts of merchandise—for example, an extra dozen with the purchase of 10 dozen. Vendors may offer slotting allowances, which are also called stocking or introductory allowances or street money, to encourage retailers to stock a product or line for the first time. These allowances can range from a few hundred to several million dollars. Although some feel that slotting allowances are nothing less than bribery, retailers feel that allowances offset the cost of introducing a new product or line. Markdown guarantees, or markdown money, another form of allowance, provides retailers with an assurance that products will sell without large markdowns or excessive reductions in gross margin. With markdown guarantees, retailers mark down and sell merchandise according to agreed-upon terms. If excessive markdowns are required in order to sell the designated merchandise, the vendor will refund a portion of the loss. Vendors offer promotional allowances in the form of money to retailers who support their products with promotional activities such as floor displays, in-store promotions, or advertising programs. Vendors also use promotional allowances to encourage stores to feature their products in high-traffic areas of the store and in prominent displays. In some cases, vendors offset all or a portion of the wages of employees dedicated to selling their product, a practice commonly seen in cosmetics. Some buyers may negotiate for damage allowances from vendors. A damage allowance covers the cost of merchandise that has been returned by a customer and cannot be resold because it has been used or damaged. With large retailers, returning each individual damaged item to the vendor can be a tedious process so a damage 90

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allowance anticipates and covers the cost of these unsellable returns. Because of the nature of the merchandise, cosmetics, small appliances, and home décor are examples of merchandise for which retailers frequently negotiate damage allowances. For example, once a cosmetic product has been opened or used, it cannot be resold to another customer. An allowance may be granted as a percent of the cost of the merchandise, but it is also common for an allowance to be granted as a specific dollar amount, specific amount per unit purchased, or percent of service provided. Often retailers use an allowance to reduce the cost of the service rather than reduce the cost of the merchandise. For example, an advertising allowance would offset the cost of time or space used for the advertisement, and an allowance for display would offset the costs associated with displaying the merchandise. Allowances are provided either off invoice or as rebates. Vendors often provide the allowance off invoice, reducing the amount initially paid for the goods. For example, a temporary price reduction would be reflected on the invoice as a reduced cost of goods. Vendors may also provide a rebate after receipts of promotional activities or tallies of sales are provided by the retailer. Rebate refers to a refund of part of the cost of the merchandise or the promotional activity. For example, a manufacturer might give the retailer a rebate to reduce the cost of merchandise sold during a sale authorized by the manufacturer. This would allow the retailer to reduce the retail price without having to take a markdown or lowering markup. However, the retailer would not receive the allowance until final sales tallies have been submitted to the vendor.

Example 4-9 A vendor offered a $1,000 rebate to retailers for purchases above $10,000. A retailer ordered 25 rugs that cost $550.00 each. When the rebate is deducted, what amount is paid to the vendor? Solution: Total billed cost, 25 * $550 = $13,750 Less the $1,000 rebate $13,750 - $1,000 = $12,750 Net cost = $12,750

Transportation Costs Because more companies today are geographically widening their sources for merchandise, and because shipping charges are rising, negotiating transportation costs and handling responsibilities are of major importance. These activities become even more important when retailers seek international sources that may include the extra costs associated with added distance, crating, import regulations, and the like. Transportation considerations are also important when the value of merchandise is high, as it is in fine jewelry or furs, or when the product is perishable under extreme conditions, as with candy or cosmetics. In most instances, the retailer pays the transportation costs associated with receiving merchandise. Transportation costs assumed by the retailer are considered part of the cost of the merchandise and must be covered in the retail price. Accordingly, it is important that the retailer negotiate for advantageous shipping charges as a means of reducing the total cost of goods. The buyer should indicate on the order the type of transportation to be used. Today, shipping costs are high, and the buyer needs to take into consideration the shipping and insurance costs, as well as the security measures and time required for transportation. If the merchandise is not needed immediately, it may be possible to use a slower, less expensive method of transportation and reduce freight/transportation costs. If the merchandise is valuable, a quicker, more expensive form of transportation may be required to reduce possible loss or damage of merchandise in transit. Cost of Merchandise Sold

91

The term that frequently is used in negotiating transportation costs is FOB (free on board). The location specified after the initials FOB indicates the point at which ownership of the merchandise changes. The buyer may refer to more specific locations in determining the actual FOB point. For example, terms such as store, plant, factory, and warehouse are often used for the destination point of the merchandise. When ordering merchandise, the buyer must consider who will pay the cost of transportation and must determine the point of transfer of ownership. Transportation terms that can be negotiated between the vendor and retailer may be designated as “FOB factory,” “FOB destination,” “FOB shipping point,” and “FOB destination; charges reversed.” FOB Factory (or FOB Origin).

The retailer takes title to the merchandise at the factory and pays all

transportation charges. The retailer assumes all risks for the goods while they are in transit. In this case, if the manufacturer is located in Chicago, the invoice would read “FOB Chicago.” FOB Destination.

The vendor pays the transportation costs and retains title to the merchandise until

it arrives at the place designated by the buyer. These terms can also be written as “FOB Store” or “FOB Buyer’s Warehouse.” The buyer takes title upon delivery of the goods. For example, if the store’s warehouse is located in Houston, the invoice would indicate “FOB Houston.” FOB Shipping (Consolidation) Point. The vendor has title to the goods and pays any crating and transportation costs for getting the merchandise to a distribution point. Once the goods arrive at the distribution point, the retailer takes ownership of the goods and pays for any further transportation costs. These terms can also be written as “FOB Consolidation Point.” If the vendor’s offices are in New York, but the vendor has a distribution center in Atlanta, the invoice would read “FOB Atlanta.” FOB Destination; Charges Reversed. The vendor owns the goods until they get to the buyer’s designated point; however, the buyer agrees to pay the transportation charges. For the retail company located in Houston, the shipping terms could indicate “FOB Houston; charges reversed.” In this case, any loss of product or damage to goods prior to delivery would be the responsibility of the vendor. In most instances, the transportation (freight) charges must be prepaid. This means that transportation costs are paid by the vendor when the merchandise is delivered to the carrier, such as UPS, a freight forwarder, or the U.S. Postal Service. When merchandise is FOB factory and freight has been prepaid, the retailer reimburses the vendor for shipping charges by adding them to the cost of the merchandise. The amount remitted to the vendor equals the net cost of the merchandise plus the cost of transportation.

Example 4-10 Merchandise with a total quoted cost of $4,500 was billed on an invoice dated March 18 with terms of 3/10 EOM, FOB factory. Transportation costs of $185 were prepaid. How much should be remitted to the vendor if the invoice is paid April 9? Solution: $4,500 less 3% (plus) transportation Amount to be paid

$4,365 185 $4,550

Example 4-11 An invoice for $2,500 was dated June 15 with terms of 6/10, n/30, FOB store. Freight charges were $265. What amount was to be remitted if the retailer paid the bill on June 24? Solution: “FOB store” means that the vendor is responsible for transportation costs. 92

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$2,500 less 6% = $2,350 Amount to be paid = $2,350 The retailer does not reimburse the vendor for transportation.

Factors and Back Offices Because retailers usually buy from vendors under different types of discounts and transportation agreements, payments for the merchandise may not be due to the vendor for at least a month, and sometimes several months, after an order has been placed. Vendors, however, must have money in advance in order to purchase fabrics and materials for production, as well as to pay workers and cover overhead expenses. If vendors do not have available funds, they may have to rely on outside firms for operating capital. Many vendors rely on factors for financial assistance. A factor is a financial firm or institution that assists vendors by acting as a credit and collection department. There are many types of factoring arrangements. Typically, unpaid orders are given to the factor, which supplies the vendor with cash advances and assumes the responsibility for collecting payments from the vendor’s customers (typically, the retailer). This arrangement allows the vendor to receive payment quickly and have working capital. The factor assumes the risk of collection and becomes responsible for credit losses. The factor is willing to take on the risk because they charge a premium interest rate, usually several points above the prime rate, along with a fee for their services. Unlike many banks, factors may consider offering financial services to vendors that do not have available assets or proven track records. Factoring may be the only way to manage increasing expenses and slow-paying customers, especially when vendors want to expand and grow. A factoring firm will advance money to a vendor by borrowing against its receivables. With this service and assistance, the vendor can finance its working capital and business operations. Using a factoring firm helps the vendor acquire funding up front to support its overhead capital, produce more goods, and meet orders. By outsourcing the accounts receivable, the vendor can focus on the design and production of goods. As the company grows, other forms of financial assistance may be sought. Once known for serving apparel companies, factors have extended their services to other industries, such as floor coverings, furniture, home goods, and consumer electronics. Factors have also expanded their offerings to U.S. companies that purchase goods overseas. Some vendors hire another type of firm, known as a back office, to help eliminate or reduce some of the overhead costs of running a business. For a fee, back offices provide services like importing and exporting, distribution, warehousing, and customer service. Essentially, a vendor can have merchandise sent from their factories to the back office warehouses where it will be shipped directly to the vendor’s customers. Most back offices also provide a computer software system for vendors to check the status of any order or to view their current inventory levels. Back offices allow the vendor to focus primarily on designing and selling merchandise and also may eliminate the need or reduce the cost for the vendor to maintain a warehouse or storage facility for its inventory.

Negotiation for Other Services Although negotiation tends to emphasize price and terms of the sale, the buyer must also negotiate for services that might be provided by the vendor. The retailer should be aware of the services commonly available from vendors and should ask for those that are of value to the retail firm. Negotiating for services will assist the buyer in improving the retailer’s profit margin. Examples of services that may be offered by a vendor include the following: • Packaging of merchandise for resale to the retailer’s customer • Preticketing, labeling, and loss prevention tagging of merchandise Cost of Merchandise Sold

93

• Cooperative advertising money • Monetary reimbursement for markdowns taken on merchandise that does not sell • Confinement and exclusivity of merchandise within a geographical area • Consignment selling, which allows for the return of merchandise that does not sell within a specified period • Point-of-purchase selling aids such as posters, display fixtures, and brochures • Vendor participation with in-store promotional events and designer personal appearances

Practice Problems • Exercise 4.3 1. If merchandise is shipped FOB Factory, is the retailer or the vendor responsible for paying transportation costs?

2. If merchandise is shipped FOB Store, is the retailer or the vendor responsible for paying the transportation costs?

3. An invoice for costume jewelry is dated October 22 with terms of 3/10, n/30, FOB Miami, Florida (the ­location of the manufacturer). The total billed cost of the merchandise is $2,840 and shipping charges of $125 have been prepaid. If the invoice is paid November 10, how much should be remitted?

4. Merchandise with a total billed cost of $2,230 arrived at the store on May 16. Terms of the invoice dated April 25 were 3/10 ROG, FOB store. Transportation charges were $128. If the invoice is paid on May 21, how much should be remitted?

5. A manufacturer ships all merchandise FOB Dallas. His own trucks transport the merchandise to Dallas, where it is turned over to the carrier specified by the retail buyer. A retailer in Kansas has ordered merchandise with a total billed cost of $8,400. The terms are 3/10 EOM. The entire order is shipped August 22, with transportation charges of $210 (from Dallas to Kansas City) prepaid. If the store pays for this merchandise on September 8, how much should be paid to the manufacturer?

6. A sportswear buyer receives a shipment of 40 dozen pairs of pants costing $21 each. The invoice is dated April 29 with terms 6/10 EOM, FOB store. Shipping charges are $182. If the bill was paid on May 11, how much was remitted to the vendor?

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7. A hosiery manufacturer in North Carolina has agreed to extend the dating so that the retailer can use a cheaper, but slower, method of transportation. Rather than customary terms of 2/10, terms of 2/10-30X have been agreed upon. Transportation is FOB Factory. Merchandise with a billed cost of $1,850 was shipped on April 14 with transportation charges of $45 prepaid. If the invoice is paid on May 10, how much should be remitted?

8. A buyer for the children’s department agreed to order merchandise with terms of 8/10, n/30. The invoice was dated January 25 with FOB Destination, charges reversed. The total cost of the merchandise was $128,230 and transportation was $251. How much should be remitted if the invoice is paid on February 14?

9. A buyer for home furnishings orders merchandise from a North Carolina vendor totaling $2,800. The vendor offers two options: (a) 3/10 net 30 FOB Destination (to buyer’s warehouse) or (b) 6/10 FOB Factory. If transportation costs are $250, which would be the better option for the buyer?

10. What is the name of a financial institution that assists vendors by acting as a credit and collections department?

Definitions Definitions

Allowance – Reimbursement or compensation granted to the retailer by the seller in return for specific services, such as advertising or display. For example, the vendor may agree to an advertising allowance whereby the retailer and vendor split the cost of the advertisement. Back Office – A firm that assists vendors with operations, logistics, warehousing, and customer service.

Billed Cost/Gross Cost – The price shown on the vendor’s invoice after deductions for trade and/or quantity discounts, but before cash discounts are taken. Buying Allowance – A price reduction for buying merchandise during a specified period. Damage Allowance – An allowance given to a retailer to compensate for the cost of merchandise that has been returned, but cannot be resold. Dating – The time limits that apply to paying for merchandise. Dating involves two different periods: (1) the last day on which the

cash discount is allowed and (2) the last day for payment before the bill is considered overdue. Advanced Dating (“As of” Dating) The periods are calculated from some future stipulated time. COD Cash on delivery means that payment is due when buyer receives goods. EOM Dating The discount day is calculated from the end of the month. Invoices dated on or after the 26th are considered to be dated the first of the following month. Extra Dating (X-Dating) The cash discount period is extended for an additional number of days. Regular/Ordinary/Normal Dating from the date of the invoice.

The periods are calculated

ROG Dating The periods are calculated from the date the goods are received.

Cost of Merchandise Sold

95

Discount – A reduction in price allowed by the seller. Cash Discount A percent reduction in price allowed if the retailer pays for merchandise before some specified date; a price reduction allowed for prompt payment.

Invoice – A bill that is enclosed with a shipment of merchandise or that is mailed by the seller to the buyer. Invoice Date – The date on the invoice, which usually is the date the merchandise is shipped.

A discount given for purchasing goods

List Price – The manufacturer’s suggested retail price. The price or dollar amount to which the trade discount is applied to obtain the billed cost.

Trade/Functional Discount A percent reduction from list price that may be one or a series of discounts.

Markdown Guarantees – An allowance offered by vendors to cover retailers’ lost gross margin dollars resulting from retail price reductions.

Discount Date – The last day on which the discount is allowed in the discount period.

Net Cost – The resulting amount to be paid for merchandise after applying discounts and transportation charges to the billed price.

Factor – Financial intermediary that collects vendors’ receivables from retailers.

Net Payment Date – Last day on which the buyer can pay for an invoice before it is considered overdue.

FOB (Free on Board) – A shipping term placed before a specific location, such as factory, origin, or store. That location is the point at which title (ownership) to the merchandise changes.

Net Terms – Notation on invoice which indicates that a cash discount is not allowed.

Quantity/Patronage Discount based on the size of the order. Seasonal Discount out of season.

A reduction in cost that is

FOB Destination The vendor pays all transportation costs and owns the merchandise until it arrives at the place designated by the buyer. These terms can also be written as “FOB Store” or “FOB Buyer’s Warehouse.” FOB Destination; Charges Reversed The vendor owns the goods until they get to the buyer’s designated point; however, the buyer pays the transportation charges. FOB Factory (FOB origin) The buyer takes title to the merchandise at the point of shipment (Factory). The buyer pays all transportation charges and assumes all risks for the goods while they are in transit. FOB Shipping (Consolidation) Point The vendor pays any crating and other costs necessary for getting the goods to a point where they can be turned over to a transportation company. These terms can also be written as “FOB Consolidation Point.” The retailer pays transportation costs from the shipping point to the store/distribution center.

Private-label goods – Merchandise that carry the retailer’s label and are sold exclusively by the retailer. Promotional Allowances – Money given to compensate a retailer for the expense of promoting a product or brand. Rebate – A refund of part of the cost of the merchandise. Robinson–Patman Act – A federal ruling that regulates price discrimination in interstate commerce. Slotting/Stocking/Introductory Allowance, or Street Money – Allowance given for stocking a new product. Terms – The conditions of the discount including the cash discount and dating. Trade Allowance – Compensation given for stocking or displaying merchandise. Vendor – Individual or firm from whom retailers buy merchandise. Also called a resource or supplier. Wholesale Price – The amount the vendor charges for goods.

Summary Problems Chapter 4 • Summary Problems

1. An invoice dated May 15 with trade discounts of 40% and 15% has terms of 3/10, n/30. The invoice reads as follows: Quantity

Item

3 1> 2 dozen

Clutch

35.00 each

2 > 3 dozen

Billfold

30.00 each

1 > 6 dozen

French purse

45.00 each

2 > 3 dozen

Card case

25.00 each

1 1 1

How much should be remitted if the invoice is paid on (a) May 25? (b) June 10?

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List Price ($)

2. An invoice is dated June 28 for $867.60 with terms of 8/10 EOM. Merchandise was received on July 3. How much is due if the invoice is paid (a) on or before July 10? (b) on August 10? (c) on August 30?

3. Merchandise received on July 20 is charged to the store on an invoice dated July 8 for $1,254 with terms of 6/10-60X. (a) What is the last day for taking the cash discount? (b) If the invoice is paid on September 17, how much should be remitted?

4. A retailer in Atlanta ordered a shipment of shoes totaling $15,800 from a vendor in California. The shipping cost was $220. The shoes were shipped FOB Atlanta; charges reversed. The shoe vendor gave the retailer a 1% damage allowance. How much did the retailer pay the vendor for the shoes?

5. On April 2, merchandise costing $15,400 reaches the retailer located in New Orleans, Louisiana. The invoice is dated March 22 and has terms of 8/10 EOM. The invoice is paid on April 10. (a) How much should be remitted? (b) If the merchandise is shipped FOB New Orleans, Louisiana, charges reversed, with transportation charges of $300, how much should be remitted?

6. Merchandise with a total billed cost of $8,320 arrived at the retailer October 6. Terms of the invoice, dated September 22, were 3/10 ROG, FOB store. Transportation charges were $210. If the invoice is paid on October 16, how much should be paid?

7. A wholesaler ordered 14 bolts of drapery fabric at $5.50 per yard. Each bolt had 60 yards. The order qualified for a quantity discount of 2%. The merchandise was shipped FOB factory; freight charges of $21.80 were prepaid. The invoice was dated March 18 with terms of 2/15, n/30. How much should be remitted if the invoice is paid on March 29?

8. The buyer for the children’s department is offered advanced dating and free transportation if the store will accept delivery of winter coats in August. The invoice, dated August 1, has a total billed cost of $2,158.60 with terms of 8/10, n/30 as of October 1, FOB store. The coats arrive August 8; transportation costs of $28.70 have been prepaid. If the invoice is paid on October 11, how much should be remitted?

9. A sportswear buyer placed the following order for coordinates: Quantity

Item

Cost ($)

4 1> 2 dozen

Blouses

19.00 each

3 > 2 dozen

Skirts

21.00 each

21>4 dozen

Pants

23.00 each

31> 6 dozen

Jackets

36.00 each

1

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The merchandise is shipped September 15 and received September 22. Invoice terms are 8/10 EOM, FOB factory; transportation charges of $24.79 have been prepaid. How much should be remitted if the invoice is paid on (a) October 8? (b) October 25?

10. The toy buyer had the option of ordering stuffed animals directly from the manufacturer or from a nearby wholesaler. The manufacturer will not ship orders for less than $1,200 total list price. Delivery typically requires five weeks, and freight averages 2.5% of total billed cost. Trade discounts on this merchandise are 40% and 10%; terms are 2/10, n/30. A wholesaler, located in the retailer’s area, stocks many of the same stuffed animals. He does not require a minimum order and will deliver at no charge in the area if the order has a billed cost of at least $500. The manufacturer and wholesaler base cost on the same list price; however, the wholesaler sells with trade discounts of 40% and 8% and terms of 1/15, n/30. (a) What is the difference in the total net cost (including freight) of merchandise with a total list price of $1,200 from these two vendors? (Be sure to take the cash discount.) (b) What other considerations should influence the choice of vendors?

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Case Study 1 To Buy or Not to Buy Joshi Preeti, M.S. University of Kentucky Tim Kendall, a men’s accessories buyer for a major retail chain, frequently travels to Guangdong, the southeastern province of China. Guangdong is China’s richest province, having seen major growth over the past few years as a result of steady increases in export goods. During his recent visit to Guangdong’s capital city to source men’s wallets and belts, Tim attended China’s largest trade fair, known as the Canton Fair. After surveying the latest wallet trends at the fair, Tim decided to introduce a new variety of high-end soft crinkle genuine cowhide leather wallets for the upcoming fall season. Two different vendors at the fair have given Tim cost prices for the wallets. Yiwu Leather Products is offering the soft crinkle genuine cowhide leather wallets in three colors at a cost price of $25.25 per wallet with a cash discount of 8%, if the invoice is paid within 10 days. This vendor is also offering a quantity discount of 15%, on top of the 8% cash discount, if Tim purchases more than 2,500 units. In addition, Yiwu Leather Products will provide Tim with special display units and signage for the wallets at no additional cost, if Tim buys more than 2,500 units. On the other hand, Shenzhen Leather Export Company is offering a similar variety of soft crinkle genuine cowhide leather wallets in two colors at a cost price of $30.56 per wallet. Shenzhen Leather will give Tim trade discounts of 15% and 10% and will allow extra dating of 90 days.

Since the crinkle leather wallets will be a new product for Tim to have in the store, he is hesitant about the number of wallets he should purchase. Based on his past sales records and current six month buying plan, Tim is comfortable in ordering up to 1,500 wallets. DISCUSSION QUESTIONS FOR CASE STUDY 1

1. If Tim decides to buy 1,500 wallets, from which vendor should he purchase the wallets and explain why? Calculate the unit cost and the total cost of the wallets from each vendor? (Assume the cash discount is taken.)

2. If Tim decides to increase his purchase to 2,500 units, which vendor should he place the order with and why?

3. Should Tim buy 2,500 units, this will be 1,000 units more than his buying plan. He will be taking a risk both in buying an excessive quantity and introducing a new product. To safeguard himself against bad sales in an event the product is not liked by his customers, what other terms can Tim negotiate for, should he decide to buy from Yiwu Leather Products?

4. Besides cost and quantity of the product, discuss other factors that Tim should be aware of before placing an order for the new wallets with these new vendors.

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Case Study 2 Selecting the Best Vendor Eun Jin Hwang, Ph.D. Indiana University of Pennsylvania Elizabeth Oaks, owner of a home décor boutique, is having trouble with her lamp vendor, Green Lighting. Merchandise is consistently delivered several weeks late and often with the wrong labels. Several lamps have been returned by customers for being defective. Recently, Elizabeth found that the same merchandise she had ordered from Green Lighting is being sold in the gray market. While the gray market is legal, the merchandise is often sold at a price much lower than the boutique’s retail price. Elizabeth recently terminated her contract with Green Lighting and now, she needs to find a new lighting vendor who she can trust and also provide good discounts and terms. Elizabeth hires a new assistant buyer, Chase Seo, for her lighting accessories department and assigns him to find a vendor. Chase visited the Dallas Total Home Market to shop for a new lamp vendor. After talking with other buyers and meeting with several lighting representatives, Chase was able to narrow the search to three different vendors. All three vendors have been reported to have good reputations, lead times, factory capacity, and product quality. Each vendor provides different discount terms and offers. In order for Elizabeth and Chase to decide which vendor they should select, they need to compare the discount terms and shipping terms that have been offered. California Lighting offers trade discounts of 5%, 15%, 10% with 2/10, n/30 (verify with answers that this is regular dating), FOB Factory. New York Lighting offers trade discounts of 10%, 5%, with 8/10 EOM, FOB Factory, and also offers a quantity discount of 5% when a buyer orders more than 75 total units. Pennsylvania Lighting offers a $500 rebate to retailers for purchases above $5,000 with 6/10, n/30, FOB Factory. Before an agreement is made and a contract is signed, Chase needs to determine the cost of the lamps from each vendor.

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DISCUSSION QUESTIONS FOR CASE STUDY 2

1. Chase decides to order the following items: Items

Quantity

Cost ($)

Desk Lamps

20

46.00 each

Table Lamps

25

68.00 each

Floor Lamps

30

89.00 each

How much should be remitted to each vendor, if Chase pays for the merchandise before the discount deadline dates expire? a. California Lighting b. New York Lighting c. Pennsylvania Lighting

2. How much should be remitted to each vendor, if Chase pays for the merchandise after the discount date and, therefore, does not take advantage of the discount date? Would it be beneficial for Chase to seek financial help from a factor so that he can take advantage of the discount date? a. California Lighting b. New York Lighting c. Pennsylvania Lighting

3. Using your answers from question number 1, if you were in Chase’s situation, which vendor would you choose and why?

4. What else does the buyer need to consider when selecting vendors?

5. Could Chase negotiate services that would help in reducing the cost of the lamps? If yes, what services?

Case Study 3 Negotiations at the Footwear Market Barbara Davis, M.S. The University of Alabama Denise is a buyer for high-end footwear retailer, Chasseurs, which carries around 20 different designer footwear labels and has 10 stores throughout the United States. Because of a recent economic downturn, traffic into the store and, consequently, sales have been much slower than usual. Denise decides to reevaluate each of her vendors to determine those that have and have not maintained profitability before and throughout the slow selling period. She intends to use this information to renegotiate terms, allowances, and discounts with the least profitable vendors at the upcoming June footwear market. After analyzing each vendor and determining her plan and open-to-buy for the next season, Denise determines that, even with renegotiations, she will need to eliminate two vendors from her current assortment. The bottom four vendors—Bella Notte, Je Veux, Serge, and Rouge—are currently about even with each other in sell-through percent and gross margin and have consistently been lowest in profitability, even before the slow economy. At the June footwear market, Denise meets with each of the four vendors individually and informs them of her situation. Each vendor has agreed to offer the following new terms and discounts in hopes of continuing their business with Chasseurs:

Vendor #1—Bella Notte—is offering terms of 3/10, n 30 with a 5% markdown allowance. Vendor #2—Je Veux—is offering terms of 2/10-50X with a quantity discount of 5% if the buyer purchases more than 1,200 pairs. Vendor #3—Serge—is offering terms of 2/10, n 30 with a 2% damage allowance. Serge has also agreed to have an in-store designer personal appearance event each season at the three largest Chasseurs stores to help increase traffic and to promote the label. Vendor #4—Rouge—is offering terms of Net 30 with a 5% markdown allowance. Since Rouge is Chasseurs’s newest vendor, they are also offering a 2% promotional allowance at the beginning of the season and point-ofpurchase posters and display fixtures to help advertise and promote the brand. Denise is pleased that each of the vendors is willing to offer improved terms and discounts to help increase their profitability with Chasseurs. She consults her plan, open-tobuy and assortment needs to determine her purchases, while comparing the cost of each vendor. Listed below is information that Denise will need to consider:

Total Pairs

Bella Notte Cost ($)

Je Veux Cost ($)

Serge Cost ($)

Rouge Cost ($)

Dress Pumps

504

145 per pair

148 per pair

150 per pair

155 per pair

Wedges

288

135 per pair

140 per pair

140 per pair

145 per pair

Ballet Flats

360

105 per pair

110 per pair

115 per pair

119 per pair

Slides

360

120 per pair

125 per pair

120 per pair

130 per pair

DISCUSSION QUESTIONS FOR CASE STUDY 3

1. What is the total billed cost for each vendor after discounts and allowances (assume the invoices are paid within 10 days)? Which two vendors offer the lowest cost of merchandise? (Solve using the Direct Method.)

2. After having a discussion with her manager, Denise decides to reduce her order quantities (in pairs) by half, even though this may negate some quantity discounts. What is the new total billed cost for each vendor after discounts and allow-

ances? Which two vendors now offer the lowest cost of merchandise?

3. Denise has decided to place her orders with the smaller quantities from Question 2. Which two vendors should Denise keep and which two should she eliminate? Justify your answers.

4. For each vendor in the case study, describe what type of discounts, dating, allowances, and services are offered to the buyer.

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MARKUP as a

MERCHANDISING TOOL

OBJECTIVES • • • •

To understand the importance of markup when pricing merchandise. To understand the timing of markups. To develop skill in calculating dollar markup and markup percent. To understand how a buyer averages markup on various items in an attempt to achieve planned markup goals. • To define and calculate three types of markup: initial, maintained, and cumulative. KEY POINTS • Markup is the difference between retail price and cost price. Markup serves as a guide in pricing merchandise and in providing the desired operating profit. • Retailers express markup primarily as a percent, because it facilitates the analysis and comparison of merchandising and operating statistics. • Markup percents may vary both within and among classifications and departments. • It is important to understand basic markup equations in order to make effective buying and pricing decisions.

5 103

Career Corner General Merchandise Manager Kasia Romo

Relevance of Merchandising Mathematics

Charming Charlie

As buyers, mathematical calculations are important for executing merchandising strategies that are crucial to purchasing the product, negotiating prices and markups, planning and forecasting sales, evaluating and controlling inventories, budgeting expenses, and most importantly, achieving company goals. Being a buyer is a multifaceted position that involves creativity and analytics in order to positively impact sales and profits.

Description of Job Responsibilities

Career Path

Kasia Romo/Charming Charlie

As a General Merchandise Manager with Charming Charlie, I develop and execute merchandising strategies, including trend forecasting, assortment planning, and profit assurance across all classifications to maximize business performance in the women’s accessories business. I work collaboratively with the buying staff as well as with the planning and allocation teams across the company. Our goal is to ensure product excellence through category domination while delivering meaningful value to Charming Charlie customers through private branding. In my position, I also oversee the execution of marketing activities that embody the Charming Charlie vision of bringing extraordinary fashion, value, and fun through a unique merchandising strategy.

After receiving my bachelor’s degree in Fashion Merchandising and while attending graduate school, I worked full-time as Manager for Limited Too stores. Upon receiving a Master of Business Administration (MBA) from Texas State University– San Marcos, I began my career as an Assistant Buyer at Stage Stores, based in Houston, eventually becoming an Associate Buyer, Buyer, and finally a Divisional Merchandise Manager for Junior sportswear. After working at Stage Stores for 11 years, I joined Charming Charlie in my current role as General Merchandise Manager. Advice for Students Interested in Merchandising Careers You must be passionate, analytical, and innovative, as well as willing to take risks and embrace change. Retail is definitely a career where you will experience many ups and downs due to the nature of the business. The business challenges you to work at a higher level every day and you must always ask questions and be willing to voice your opinions and ideas. Stay on top of the competition and most importantly, love the product!

Markup Defined Once the retailer has negotiated for the lowest possible cost of goods from the vendor, the next step is to determine what price the goods will sell at retail. The difference between the buying price (cost) and the selling price is a major factor in determining profit. The amount added to the cost of goods to achieve the retail price is called markup. It is a major tool used in pricing merchandise, but should serve as a guide rather than a determinant in establishing selling prices. As a key component in the merchandising process, markup of the merchandise will eventually determine the gross margin and profit achieved. One way to define markup is that it is the amount added to the cost price in order to establish the retail price. Markup serves as a guide in pricing merchandise and in providing the desired operating profit. Careful analysis and planning of prices are necessary in order to achieve a profit. Pricing considerations and strategies are discussed in Chapter 6. Before retailers set prices, it is important to have a basic understanding of markup definitions and calculations. Another way to define markup is the difference between the retail price of merchandise and its cost. Markup ⴝ Retail ⴚ Cost

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This formula may also be written as Cost ⴝ Retail ⴚ Markup and Retail ⴝ Cost ⴙ Markup Even though retailers are concerned primarily with markup as a percent, markup can be expressed as a dollar figure. The basic formula is the same whether one works with dollar figures or percents. Markup is sometimes referred to as markon. Although the terms markup and markon are often used synonymously, they have slightly different meanings. Markup is most commonly applied to the amount added to cost to determine the retail prices of individual items, whereas markon is sometimes used to refer to the total amount added to the cost of all the merchandise in a department. Furthermore, markon is more frequently used at the manufacturing level, and markup at the retail level, of the distribution chain. In this workbook, the term markup will be used.

Markup as a Percent Retailers find working with percents more meaningful than working with markup dollars because percents allow for comparisons. Comparisons may be made within or among classifications and departments. Markup statistics are frequently exchanged among stores within an ownership group and among stores using a centralized buying office. For example, Macy’s Inc. might compare the markup figures of Bloomingdale’s with those of Macy’s. Markup can be calculated as a percent of either cost or retail price. Some small, independently owned retailers may use markup based on cost. However, most department stores and fashion specialty stores base markup on retail price. The retail base is generally accepted as more meaningful, since expenses and profits are figured as percents of net sales. The calculation of markup on retail provides consistency because retailers plan price lines, stock, and sales in retail values. Markup and expense percents cannot be compared if they are based on different figures; both must be based on either retail or cost figures. Some retailers, especially small independently owned stores, will use keystone markup, which is a markup that doubles the invoiced cost of the merchandise. Thus, the retail price will be twice the cost of the goods. For example, using keystone markup, a bridal dress that invoiced for $5,000 will have a retail price of $10,000 (the retail price is twice the cost or multiplied by a factor of 2.0). Using keystone markup will provide a 100% markup based on cost or a 50% markup, based on retail. Some retailers will use a higher factor, such as 2.1 or 2.5 when determining the retail price. This will provide a higher markup to ensure profitability. For example, using a 2.1 factor on a bridal dress that invoiced for $5,000 will provide a retail price of $10,500 for the dress. In this workbook, all markups in problems are to be calculated as a percent of retail price unless otherwise indicated.

Calculating Markup Percent Based on Retail To determine markup percent based on retail, divide dollar markup by retail. Dollar markup is equal to retail minus cost. When markup percent is based on retail, retail always equals 100%.

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$ Markup = $ Retail - $ Cost Markup % Based on Retail ⴝ $ Markup ⴜ $ Retail

Example 5-1 What is the markup percent (based on retail) for a dress that costs $40 and retails for $80? Solution: Markup % = $ Markup , $ Retail = ($80 - $40) , $80 = $40 , $80 = $ 0.50 = 50% (based on retail)

Example 5-2 A coat retails for $200. Find the markup percent based on retail when the cost of the coat is $105. Solution: Markup % = $ Markup , $ Retail = ($200 - $105) , $200 = $95 , $200 = $0.475 = 47.5% (based on retail)

Calculating Markup Percent Based on Cost Markup based on cost price is sometimes used by small, independently owned stores. These stores may be reluctant to change to markup based on retail out of habit or unwillingness to change old, trusted methods. Large retailers seldom base markup on cost. To determine the markup percent based on cost, divide dollar markup by cost. Since cost is the base, cost equals 100%. Markup % Based on Cost ⴝ $ Markup ⴜ $ Cost

Example 5-3 A man’s suit retails for $210 and costs $120. What is the markup percent based on cost? Solution: Markup % = $ Markup , $ Cost = ($210 - $120) , $120 = $90 , $120 = $0.75 = 75% (markup based on cost)

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TABLE 5-1 Comparison of Markup Based on Cost with Markup Based on Retail Markup based on cost (%)

Markup based on retail (%)

25

20

66 2>3

40

100

50

150

60

300

75

900

90

Example 5-4 Determine the markup percent based on cost for a shirt that costs $25 and retails for $40. Solution: Markup % = $ Markup , $ Cost = ($40 - $25) , $25 = $0.60 = 60% (markup based on cost)

Comparison of Markup Based on Cost with Markup Based on Retail Markup percent based on retail is always less than 100%; however, markup percent based on cost may exceed 100%. It is important to understand the difference between markup based on cost and markup based on retail. Table 5-1 uses markup equivalents to compare markup based on cost with markup based on retail. As the table shows, markup percents based on cost are always larger than markup percents based on retail. The retail price remains constant, whereas the markup percent varies according to whether the retail or cost base is used.

Example 5-5 Compare the markup percents based on retail with those based on cost for a blouse that costs $24 and retails for $40. First, find the dollar markup, which is $16 ($40 - $24). Solution: Markup % Based on Cost = $ Markup , $ Cost = $16 , $24 = 66.67% Markup % Based on Retail = $ Markup , $ Retail = $16 , $40 = 40% It is important to remember that the base figure is always 100%. In finding markup based on retail, retail is 100%, and in determining markup based on cost, cost is 100%.

Basic Markup Calculations When you work with basic markup calculations, it may be helpful to write the appropriate formula and insert the given dollar and percent figures. Doing this will make the relationships more apparent. Remember, since you are working with markup based on retail, retail will always be 100%. Markup as a Merchandising Tool

107

Some students may find the problems clearer by arranging the three factors vertically rather than horizontally: Markup

Retail

+ Cost

– Markup

Retail

Cost

Retail – Cost Markup

Markup percent can be calculated when cost and retail are known. Retail can be calculated when cost and markup percent are known, and cost can be calculated when markup percent and retail are known. A buyer works with markup in three different ways: 1. Calculating markup percent when cost and retail are known 2. Calculating retail when cost and markup percent are known 3. Calculating cost when retail and markup percent are known 1. Calculating Markup Percent when Cost and Retail Are Known To achieve maximum profits, a buyer must evaluate many factors when purchasing merchandise. In deciding whether to buy an item, a buyer must consider whether the markup obtained is adequate to reach the department’s ultimate goal. To determine markup percent, find markup dollars ($ retail minus $ cost) and divide by retail dollars. Given the dollar cost and dollar retail, markup percent can be determined from the following formula: Markup % ⴝ $ Markup ⴜ $ Retail

Example 5-6 What is the markup percent on a jacket that costs $66 and retails for $120? Solution: $ Retail - Cost

%

=

$120

=

100%

=

- 66

=

-

Markup

$54

?

Markup % = $ Markup , $ Retail = $54 , $120 = 45%

Example 5-7 What is the markup percent on a shirt that costs $18 and retails for $34? Solution: Markup $ = $ Retail - $ Cost = $34 - $18 = $16 Markup % = $ Markup , $ Retail = $16 , $34 = 47.06% NOTE: Remember the following rule from Chapter 2: Round off percents so that the answers are correct to two decimal places. For instance, in the previous example, 0.470588 = 47.0588% is rounded off to 47.06%.

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2. Calculating Retail When Cost and Markup Percent Are Known In deciding what to purchase, buyers must evaluate the retail prices that will be placed on merchandise, taking into account both the cost price and the markup percent needed. Buyers need to evaluate the retail prices in order to determine whether customers would be willing to buy merchandise at those prices. To determine the retail price, given the cost and markup percent, find the cost complement (100% markup%) and divide dollar cost by cost complement percent. The cost complement, or cost percent, is the difference between retail percent (100%) and markup percent. For example, the cost complement of a 40% markup is 60% (100% minus markup%). This is the same as saying that cost is 60%. The following formulas will be helpful in finding retail when the cost and markup percents are known: Cost Complement % ⴝ Retail % ⴚ Markup % $ Retail ⴝ $ Cost ⴜ Cost %

Example 5-8 Calculate the retail price on a sofa table that costs the store $420 and has a 52% markup. Solution: $

%

Retail

=

=

100

–Markup

=

=

–52

Cost

=

$420

48%

$ Retail = $ Cost , Cost % = $420 , 48% = $875

3. Calculating Cost When Retail and Markup Percent Are Known Buyers must be able to determine the price they can afford to pay for each item purchased in order to achieve their planned markup goal. To determine the cost when retail dollars and markup percent are known, find the cost complement percent and multiply retail (dollars) times cost complement percent. &RVW ⴝ 5HWDLO : &RVW

Example 5-9 Determine the cost of a dress that retails for $180.00 and has a 55% markup. Solution: Cost Complement = Retail % - Markup % = 100% - 55% = 45% $ Cost

= $ Retail * Cost % = $180 * 45% = $81

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Example 5-10 An alternative solution for determining cost dollars is to find markup dollars and subtract markup dollars from retail dollars. Solution: $ Cost = $ Retail - $ Markup = $180 - ($180 * 55%) = $180 - $99 = $81 When working with markup, you are applying the same basic percent calculations that were reviewed in Chapter 2. For example, when determining retail, you are using the same calculation as finding the base figure. Retail is 100%, since it is the base figure.

Practice Problems • Exercise 5.1 Fill in the blanks for Problems 1 through 15. Retail ($) 1.

$149.00

2.

$25.00

$440.00

5.

$150.00

50% 75%

$100.00

6.

65 1> 2%

$80.00

7.

$30.00/dozen

8.

$22.98

/unit

$120.00 $14.50

$100.00

/unit

14. 15.

$95.50

44%

52 1>5%

$3.80

$650.00

48%

$7.83

11.

13.

54% 42.5%

9.

12.

Cost (%)

$12.75 $45.98

4.

Markup (%) 67 1>4%

3.

10.

Cost ($)

$100.80/dozen

60%

$375.00 58%

16. Hand-tooled belts for the men’s department cost $180 a dozen. If a 47 1>2 markup is required, what unit retail would achieve this markup?

17. Find the cost of a dress that retails for $185 and has a 55% markup.

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18. What retail price on a walnut entertainment center that costs $2,500 would provide a 58% markup?

19. Determine the markup percent on a child’s hand-smocked dress that cost $45 and retails for $110.

20. A buyer of men’s furnishings paid $168 per dozen for jute belts. What unit retail will provide a 52.25% markup?

21. A furniture store’s feature of the week is a cherry table that retails for $1,200 with a 64% markup. Find the cost of the table.

22. The paint department received a shipment of brushes that costs $4.50 each and retails for $9.75 each. Find the (a) cost percent and the (b) markup percent.

23. Find the (a) cost percent and (b) dollar cost for a scarf that retails for $18 and was marked up 40.5%?

24. Determine the markup percent for hand-blown wine glasses costing $132 a dozen and retailing for $22 each.

25. Determine the markup percent (a) based on retail and (b) based on cost for an antique mirror that the buyer purchased for $850 and priced at retail for $1,500.

Markup Percent on a Group of Items At times, it is necessary to determine the markup percent on an order or a shipment of merchandise that includes items with different cost and retail values. To compute the markup percent on an entire order (merchandise with varying cost and/or retail values), determine total cost and total retail, and then subtract to determine total markup dollars. Markup as a Merchandising Tool

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Example 5-11 Find the markup percent on the following order: Quantity

$ Cost

$ Retail

14 skirts

20 each

45 each

25 blouses

18 each

40 each

10 belts

16 each

30 each

Solution: Find total cost and total retail: Cost

Retail

14 * $20 = $280

14 * $45 = $630

25 * $18 = $450

25 * $40 = $1,000

10 * $16 = $160

10 * $30 = $ 300

Total cost $890

Total retail $1,930

Find total markup dollars: $ Markup = $ Retail - $ Cost = $1,930 - $890 = $1,040 Find markup percent: Markup % = $ Markup , $ Retail = $1,040 , $1,930 = $ 0.53886 = 53.89%

Example 5-12 Determine the markup percent on the following group of merchandise: Quantity

$ Cost

$ Retail

120 pr socks

36.00/dozen

6.50 each

120 pr socks

2.50 each

5.50 each

Solution: Find total cost and total retail: Cost

Retail

120 * $3.00 = $360

120 * $6.50 = $ 780

120 * $2.50 = $300

120 * $5.50 = $ 660

Total cost $660

Total retail $1,440

Find total markup dollars: $ Markup = $ Retail - $ Cost = $1,440 - $660 = $780 112

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Find markup percent: Markup % = $ Markup , $ Retail = $780 , $1,440 = $ 0.54166 = 54.17%

Practice Problems • Exercise 5.2 1. Determine the markup percent on the following order: Quantity

$ Cost

$ Retail

18 belts

60.00/dozen

10.00 each

11 scarves

11.00 each

20.00 each

14 stickpins

4.50 each

10.00 each

2. A buyer coordinated a special purchase of men’s shirts from a manufacturer. Determine the markup percent on this purchase: Quantity

$ Cost

$ Retail

14 white shirts

15 each

34 each

24 plaid shirts

20 each

38 each

45 oxford shirts

14 each

30 each

10 knit shirts

120/dozen

25 each

3. Find the markup percent on this order that a buyer purchased for a special sale: 100 hand towels costing $22.80/dozen, to sell at $3.50 each 9 2>3 dozen washcloths costing $1.20 each, to sell at $2.10 each 85 bath towels costing $4.25 each, to sell at $8.00 each 21> 4 dozen beach towels costing $5.50 each, to sell at $10.98 each

4. Determine the markup percent on the following purchase for a handbag department: Quantity

$ Cost

$ Retail

2 dozen

132/dozen

20 each

1 > 6 dozen

15 each

28 each

3 > 3 dozen

12 each

25 each

1 1

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5. What is the markup percent on the following order? Quantity

$ Cost

$ Retail

30 brass lamps

119 each

198 each

24 crystal lamps

189 each

400 each

18 porcelain lamps

159 each

325 each

6. The buyer needs a group of T-shirts for a special sale. He buys 40 dozen at $84/dozen, 20 dozen at $96/ dozen, and 15 dozen at $120/dozen. If he marks them all at a sale price of $18.00 each, what markup percent is realized on the merchandise?

Timing of Markups Although a retailer sets the original retail price to achieve the desired markup, the markup on the merchandise can change throughout the selling season for many different reasons. Merchandise does not always sell at the original retail price. While retailers would like to sell goods at the price that is first placed on merchandise, they may have to reduce the price of merchandise in order to move the goods. Temporary sales, coupons, markdowns, and other factors that lower the retail price of an item will also lower the markup on an item. Merchandise is given an initial markup as it is received into the store, but that will not necessarily be the markup achieved when the merchandise is sold. It is also important to understand that not all merchandise has the same markup. Sometimes lower markup goods are carried by retailers because they generate traffic and contribute to the sale of other merchandise. Retailers may offset this lower markup by placing higher markups on other goods. Because different markup rates are used, retailers will find their average markup, which is calculated by using the total cost and total retail of the merchandise. New merchandise received throughout the season may have a higher or lower markup than the current inventory, so retailers must calculate their cumulative markup to get the total average. Cumulative markup is an average figure, since it is the markup on merchandise that has accumulated during a certain time period. Cumulative markups are calculated for a group of items with different markups for a given period. Maintained markup is the final markup of an item when it is sold. The retailer cannot determine the maintained markup in advance because it is based on actual retail sales. It is important to understand that the markup on an item can change depending on the retail climate and selling success of the item. Sell-through percent is a measure that tells a retailer how much of a style or product has been sold and is the best indicator of the selling success of an item. Sell-through is calculated by comparing the amount of merchandise that was sold during a certain period with the amount of merchandise that was on hand during the same time period. If an item has a consistently low sell-through percent, the buyer will typically reduce the price, which lowers the markup on the item. Sell-through percent is discussed in more detail in Chapter 6. Markup is one of the most important and fundamental concepts used in merchandising operations. Retailers must constantly monitor markup and analyze prices of merchandise carefully to provide consumers with the right merchandise and obtain a desirable profit. The remaining section of this chapter will illustrate and explain different types of markup. 114

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Averaging Markups Merchandise must be priced to sell in a competitive environment. When pricing merchandise, retailers do not apply the same markup percent to all merchandise. Even in the same classification, not all merchandise will have identical markup. To achieve maximum sales, buyers may have to use markups that are considerably more or less than the desired overall markup goal. For instance, the buyer may take a lower markup on promotional goods, whereas it may be possible to obtain a higher markup on exclusive or unique items. That is, buyers must balance markups that are below average with above-average markups to achieve the planned department markup goal. The practice of averaging markups is frequently found in apparel and home-furnishings departments because of the rapid changes that occur throughout the fashion world. The buyer usually has less control over markups on staple items, but increased promotional emphasis can be given to lines carrying the higher markups. Markups can be averaged on an entire stock of goods, a single purchase, or a group of purchases. An average markup is determined by working with total cost and total retail. The following example illustrates how to find total cost and total retail:

Example 5-13 A buyer has placed an order for 20 shirts that cost $14 each and will retail for $24 each. She also purchases 18 shirts costing $12 each and retailing for $21 each. Find the total cost and total retail. Solution: Units * Cost price

=

Total cost

20 * $14

=

$280

18 * $12

=

$216 $496

Units * Retail price

=

Total retail

20 * $24

=

$480

18 * $21

=

$378 $858

The average markup cannot be determined by averaging the markup on individual items. An average markup is determined by working with the total cost and total retail. Remember, individual percents cannot be averaged unless the quantities are exactly the same. The sections that follow illustrate three types of problems in which markup is averaged: 1. Calculating the markup percent needed on a balance of purchases when the planned markup percent is known 2. Averaging costs when the retail percent and the markup percent are known 3. Averaging retail when the cost and the markup percent needed are known Each section begins with an explanation indicating the circumstances under which such a problem might occur in a retail store. The examples that follow will help you understand the process used in problems averaging markup. In working out word problems, it is important to understand clearly what you are trying to find. In solving these problems, the first steps are to determine information given and to identify information needed to complete the problem. Several steps are required to solve each type of problem. Markup as a Merchandising Tool

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1. Calculating Markup Percent Needed on Balance of Purchases when Planned Markup Percent Is Known Buyers must be able to determine the markup percent needed on a balance of purchases in order to achieve the planned markup goal (an average). This requires working with total cost and total retail values. The following examples illustrate calculating markup percent needed on a balance of purchases when planned markup percent is known:

Example 5-14 A buyer for a children’s department needs $12,000 worth of merchandise at retail for the month. She has already purchased 200 dresses that cost $18.00 each and will retail for $30.00 each. What markup percent must she obtain on the remaining purchases in order to average a 54% markup for the month? Total Needs Retail

$12,000

Purchases 200 at $30 (b) $6,000

Cost

(a) $5,520

(d) $6,000

200 at $18 (c) $3,600

Markup %

Balance

54%

(e) $1,920 Markup balance (f) 68%

First ask: What are you trying to find? Markup percent on balance. Solution: (a) Find total needs at cost: Cost = $ Retail * Cost % = $12,000 * (100% - 54%) = $12,000 * 46% = $5,520 (b) Find retail value of purchases: Retail = 200 * $30 = $6,000 (c) Find cost value of purchases: Cost = 200 * $18 = $3,600 (d) Find balance at retail: Retail Balance = Total Retail - Retail of Dresses Purchased = $12,000 - $6,000 = $6,000 (e) Find balance at cost: Cost Balance = Total Cost - Cost of Dresses Purchased = $5,520 - $3,600 = $1,920 (f) Find markup percent needed on balance: Markup % Balance = =

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Retail Balance - Cost Balance Retail Balance $6,000 - $1,920 $4,080 = = 68% $6,000 $6,000

Example 5-15 The buyer for the children’s department plans to purchase approximately $3,800 (retail) worth of sweaters. She will operate with a 52.5% markup. Her first purchase is for 6 dozen sweaters costing $14.60 each that she plans to retail for $24.90 each. What percent markup must be obtained on the balance of sweaters in order to average a 52.5% markup?

Retail

Total Needs

Purchases

$3,800

6 dozen at $24.90 (c) $1,792.80

Cost

(a) $1,805

(d) $2,007.20

6 dozen at $14.60 (b) $1,051.20

Markup %

Balance

52.5%

(e) $753.80 Markup balance (f) 62.45%

Solution: (a) Find total needs at cost: Total Cost = $ Retail * Cost % = $3,800.00 * (100% - 52.5%) = $3,800.00 * 47.5% = $1,805.00 (b) Find cost value of purchases: = 72 units

6 dozen

72 * $14.60 each = $1,051.20 cost (c) Find retail value of purchases: 72 * $24.90 each = $1,792.80 retail (d) Find balance at retail: Retail Balance = Total Retail - Retail of Sweaters Purchased = $3,800.00 - $1,792.80 = $2,007.20 (e) Find balance at cost: Cost Balance = Total Cost - Cost of Sweaters Purchased = $1,805.00 - $1,051.20 = $753.80 (f) Find markup percent needed on balance: Markup % = Markup $ on Balance , $ Retail Balance =

$1,253.40 $2,007.20 - $753.80 = = 62.45% $2,007.20 $2,007.20

2. Averaging Costs when Retail Dollars and Markup Percents Are Known Many times, a buyer will have a retail price line that consists of merchandise with different costs. This means buying merchandise at close, but different, costs and marking the goods at the same retail price. The following examples illustrate the calculation of averaging costs when retail dollars and markup percents are known:

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Example 5-16 A buyer plans to purchase 300 pairs of slacks for an anniversary sale to retail for $26.00 each. The buyer has already placed an order for 170 pairs at $12.00 each (cost). What is the most he can pay for each remaining pair of slacks if he is to achieve the department’s markup goal of 52%? Total Needs Retail

Purchases

Balance

170 at $12

(d) $1,704 (total)

(c) $2,040

(e) $13.11 (unit)

300 at $26 (a) $7,800

Cost

(b) $3,744

Markup %

52%

First ask: What are you trying to find? Unit cost on balance. Solution: (a) Find total retail: 300 * $26 = $7,800 (b) Find total cost: Cost = $ Retail * Cost % = $7,800 * (100% - 52%) = $7,800 * 48% = $3,744 (c) Find the cost of slacks purchased: 170 * $12 = $2,040 (d) Find the balance that can be spent on slacks: Total Cost - Cost of Slacks Purchased = Balance $3,744

- $2,040

= $1,704

(e) Find the unit cost of slacks to be purchased: Number of slacks still needed = 300 - 170 = 130 Cost Balance , Number of Slacks Still Needed = Unit Cost $1,704.00 , 130 = $13.11 each

Example 5-17 A sportswear buyer needs to average a 48% markup. He needs 120 skirts to retail at $21.00 each and 80 jackets to retail at $38.00 each. If he pays $20.00 for each jacket, how much can he pay for each skirt in order to achieve his planned markup percent? Total Needs Retail

Purchases

Balance

80 at $20

Total (d) $1,291.20

(c) $1,600

Unit (e) $10.76

80 at $38 120 at $21 (a) $5,560

Cost

Markup %

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(b) $2,891.20

48%

First ask: What are you trying to find? Cost per skirt. Remember: You must find totals before determining unit cost. Solution: (a) Find total retail for the merchandise: 80 ( jackets ) * $38 = $3,040 120 ( skirts ) * $21 =

$2,520 $5,560 total retail needed

(b) Find total cost for the merchandise: Cost = $ Retail * Cost % = $5,560 * (100% - 48%) = $5,560 * 52% = $2,891.20 (c) Find cost of the jackets purchased: 80 * $20 = $1,600 cost (d) Find the balance cost that can be spent on skirts: Total Cost - Cost of Jackets = Cost of Skirts $2,891.20 - $1,600

= $1,291.20

(e) Find the unit cost of each skirt: Cost Balance , Number of Skirts to be Purchased = Unit Cost $1,291.20 , 120

= $10.76 unit cost

3. Averaging Retail when Cost and Needed Markup Percent Are Known

In order to achieve a

planned markup goal, buyers must determine an average retail price for purchases made at two or more different cost prices. The following examples involve finding an average retail price when costs and markup percents are known:

Example 5-18 A buyer for the men’s department purchased a group of shirts that consisted of 10 shirts at $11.00 each, 20 shirts at $12.00 each, and 12 shirts at $14.00 each. He plans to sell all of the shirts at the same price. What unit retail price will result in a 58% markup? Markup %

Cost

Retail

58%

10 at $11

Total retail (b) $1,233.33

20 at $12

Unit retail (c) $29.37

12 at $14 42 Total cost (a) $518

First ask: What are you trying to find? Retail per shirt. Markup as a Merchandising Tool

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Solution: (a) Find total cost: 10 * $11 = $110 20 * $12 = $240 12 * $14 = $168 $518 total cost (b) Find total retail needed to obtain a 58% markup: Retail = $Cost , Cost % = $518.00 , 42% = $1,233.33 (c) Find retail for each shirt: Retail per Shirt = Total Retail , Number of Shirts = $1233.33 , 42 = $29.37 (d) Each shirt should retail for at least $29.37 in order to obtain a 58% average markup.

Example 5-19 The sportswear buyer purchased 30 corduroy jackets that cost $34.75 each and 48 tweed jackets that cost $39.75 each. She wants a 55.5% overall markup. If she retails the corduroy jackets for $60.00 each, what must the average retail price be for each tweed jacket in order to achieve the planned markup percent? Markup %

Cost

Retail (b) Total retail = $6,630.34

55.5%

30 at $34.75

(c) 30 corduroy at $60 = $1,800

48 at $39.75

(d) 48 tweed = $4,830.34 (e) unit 100.63

Total cost (a) $2,950.50

First ask: What are you trying to find? Retail per tweed jacket. Solution: (a) Find total cost: 30 * $34.75 = $1,042.50 48 * $39.75 = $1,908.00 $2,950.50 total cost (b) Find total retail needed to obtain a 55.5% markup: Retail = $ Cost , Cost % = $2,950.50 , 44.5% = $6,630.34 (c) Find retail contributed by corduroy jackets: 30 * $60 each = $1,800 120

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(d) Find retail needed for tweed jackets: Retail for Tweed = Total Retail - Retail of Corduroy = $6,630.34 - $1,800.00 = $4,830.34 (e) Find retail for each tweed jacket: Retail for Each = Total Retail , Number of Tweed Jackets = $4,830.34 , 48 = $100.63 Each tweed jacket should retail for at least $100.63 in order to achieve a 55% average markup.

Practice Problems • Exercise 5.3 1. A buyer purchased the following rugs: 25 Savonnerie rugs

$1,210 each

30 Aubusson rugs

$1,290 each

22 Kirban rugs

$1,250 each

The average markup percent must be 52%. What should be the retail price for each rug if all rugs are to be sold at the same price?

2. A buyer plans to purchase 400 skirts that will retail for $120 each. She has already placed an order for 320 skirts at $48 each (cost). What is the most she can pay for each of the remaining skirts if she is to obtain the departmental markup of 56.5%?

3. The owner of The Perfect Florist Shop intends to buy vases with a retail value of $14,000. He has purchased 200 vases at $14 each that will retail for $32 each. What markup should he obtain on the remaining vases in order to achieve a 62% markup goal?

4. For a holiday catalog, a buyer purchased the following decorative items at a manufacturer’s closeout sale: 10 foot baths

$125 each

15 ginger jars

$110 each

25 tureens

$75 each

14 planters

$90 each

If all decorative pieces are to be retailed at the same price, what unit retail price will result in a 61.25% markup?

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5. A buyer for a small sporting goods store needs to purchase merchandise with a cost of $10,000. She has purchased football jerseys costing $8,000 that will retail for $14,000. If she is to achieve a 51.5% markup goal, what markup percent will be needed on the remainder of the goods?

6. For a special sale, a buyer plans to purchase 150 blouses that will retail for $48 each. She has already ordered 80 blouses at $20 (cost) each. What is the most she can pay for each remaining blouse if she is to achieve the department’s average markup goal of 60%?

7. For a Christmas catalog, a buyer plans to purchase 500 bird feeders to retail for $45 each. He placed an order for 350 feeders that cost $25 each. What is the most he can pay for each of the remaining feeders if he wishes to average a 42% markup?

8. A buyer for women’s sportswear purchased 10 cotton sweaters at $52 each and 22 linen sweaters at $66 each. If all sweaters are to be retailed at the same price, what average retail will provide a 52% markup?

9. During the month, a buyer plans to purchase damask tablecloths that cost $8,000. He has purchased tablecloths that cost $2,000 and will retail for $3,800. What markup percent should the buyer obtain on the balance of his purchases in order to obtain a markup of 60%?

10. A buyer needs to purchase 200 scarves to sell for $25 each. He has ordered 140 scarves at $10 each (cost). What is the most he can pay for each of the remaining scarves in order to obtain an average markup of 54%?

11. A buyer needs to average a 57% markup. He has purchased 50 silk jackets that cost $78 each and 38 wool jackets that cost $60 each. If he plans to retail the silk jackets for $175 each, what must be the average retail price for each of the wool jackets in order to maintain the planned markup percent?

12. The buyer in the juniors’ department plans to purchase $45,000 (retail) worth of jackets. She has purchased 5 1>4 dozen jackets costing $80 each that she plans to sell for $140 each at retail price. What markup percent must be obtained on the balance of the jackets in order to average a 53% markup?

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13. A buyer plans to purchase $30,000 (retail) worth of comforters. She purchased 9 1>2 dozen comforters costing $90 each, which she plans to sell for $180 each at retail price. What markup percent must be obtained on the balance of the comforters in order to average a 48% markup?

14. During July, a buyer plans to buy suits with a retail value of $120,000. He has purchased 300 suits at $90 each that will retail for $200 each. What markup percent should he obtain on the remaining suits in order to achieve a 57% markup goal?

15. A buyer needs to average a 60% markup. She has purchased 54 cashmere sweaters that cost $58 each and 48 merino wool sweaters that cost $32 each. If she plans to retail the cashmere sweaters for $139 each, what must be the average retail price for each of the merino wool sweaters in order to maintain the planned markup percent?

Initial Markup Initial markup is the markup that is placed on merchandise as it is received into the store. Initial markup can be planned by working with either dollar figures or percents. It is important to keep in mind that initial markup is based on the first, or original, retail price of the goods. Initial markup should be large enough to cover expenses and reductions and to provide a profit. A loss will occur if the initial markup does not cover expenses and reductions. Initial markup is the difference between the billed cost of merchandise and the original retail price placed on an item or group of items. Remember that billed cost is the price of the goods as stated on the vendor’s invoice. When transportation charges are available, they are added to billed cost in calculating initial markup. Billed cost is the cost after quantity and/or trade discounts are deducted, but before cash discounts are deducted. Initial Markup % ⴝ

Expenses ⴙ Profit ⴙ Reductions Net Sales ⴙ Reductions

As shown in the preceding formula, reductions must be added to both the numerator and the denominator. Because markup must cover expenses, reductions, and profit, all of these factors are in the numerator. (Adjustments for alteration costs and cash discounts will be explained later.) The denominator represents the original retail value—that is, net sales plus reductions. Remember, initial markup is based on the first retail price. Not all items in an assortment sell at the original retail price, due to markdowns, discounts to employees and customers, and shortages. Since markdowns, employee discounts, and shortages reduce the sales that can be obtained from a merchandise assortment, they are called retail reductions. Retail reductions are factors that reduce the retail value of a merchandise assortment. These factors include markdowns, employee discounts, special customer discounts, and stock shortages. Markup as a Merchandising Tool

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Example 5-20 What should be the initial markup percent in a department having the following figures? Net sales

$170,000

Profit

$6,000

Expenses

$80,000

Employee discounts

$400

Markdowns

$5,200

Shortages

$600

Solution: Initial Markup % = =

Expenses + Profit + Reductions Net Sales + Reductions $80,000 + $6,000 + $170,000 +

1 $400

1 $400

+ $5,200 + $600 2

+ $5,200 + $600 2

=

$80,000 + $6,000 + $6,200 $170,000 + $6,200

=

$ 92,200 $176,200

= 52.33 % Other factors that can affect the initial markup are workroom/alteration costs and cash discounts. Employee discounts, markdowns, and shortages reduce the retail value of goods; workroom/alteration costs increase the retail value of goods. An example of alteration costs is the expense associated with making changes or adjustments to a garment or other product; an example of workroom costs is the cost of construction of draperies, curtains, and furniture slipcovers. Retailers are sometimes required to assemble products that are not fully assembled by the vendor. These additional costs are included in the retail value of the goods because the value added by the retailer increases the value of the goods. Workroom and alteration costs can include expenses for labor, supplies, and services that are not offset by customer fees. In calculating initial markup percent, cash discounts are subtracted from the numerator, since they represent a reduction in the cost of the merchandise. Therefore, the modified initial markup percent equation is as follows: Initial Markup % ⴝ

Expenses ⴙ Profit ⴙ Reductions ⴙ Alterations ⴚ Cash Discounts Net Sales ⴙ Reductions

Example 5-21A Determine the necessary initial markup percent for a department having these planned figures: Net sales

$100,000

Expenses

$40,000

Reductions

$10,000

Alteration costs

$900

Cash discounts

$750

Profit

$5,000

Solution: Initial Markup % = 124

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Expenses + Profit + Reductions + Alterations - Cash Discounts Net Sales + Reductions

=

$40,000 + $5,000 + $10,000 + $900 - $750 $100,000 + $10,000

=

$ 55,150 = 50.14% $110,000

Retailers may plan initial markup with percents of net sales rather than in specific dollar amounts. (Remember that net sales = 100%.) The same equation can also be used when working with percents.

Example 5-21B Determine initial markup percent. Net sales

$100,000

100.00%

Expenses

$40,000

40.00%

Reductions

$10,000

10.00%

Alteration costs

$900

0.90%

Cash discounts

$750

0.75%

$5,000

5.00%

Profit Solution:

Initial Markup % =

Expenses + Profit + Reductions + Alteration Costs - Cash Discounts Net Sales + Reductions

=

40% + 5% + 10% + 0.9% - 0.75% 100% + 10%

=

55.15% = 50.14% 110%

Reduction figures are frequently given individually and must be added together. The following example reports all items needed for calculating initial markup in percents:

Example 5-22 Determine the initial markup percent that will be required to achieve a 4% profit, using the following figures: Expenses

39.1%

Employee discounts

6.8%

Markdowns

4.2%

Shortages

1.0%

Alterations

0.5%

Cash discounts

0.6%

Profit

4.0%

Solution: Initial Markup % =

Expenses + Profit + Reductions + Alterations - Cash Discounts Net Sales + Reductions

Reductions = Employee Discounts + Markdowns + Shortages = 6.8% + 4.2% + 1% = 12% Markup as a Merchandising Tool

125

Initial Markup % = =

39.1% + 4% + 12% + 0.5% - 0.6% 100% + 12% 55% 112%

= 49.11% NOTE: Net sales always equal 100%, since all other percents are based on net sales.

To determine initial markup, it may be necessary to convert percents into dollar amounts. In the next example, some items are reported in dollars and others are listed as percents. Before working the problem, convert the items listed as percents into dollar figures. To convert the percents to dollars, multiply the percent by net sales.

Example 5-23 Calculate the initial markup percent that will enable the department to achieve a 9% profit. Net sales

$220,000

Markdowns

4%

Employee discounts

2,100

Shortages

1,900

Expenses

95,000

Profit

9%

Cash discounts

5,400

Alteration costs

2,600

Solution: First determine the markdown and profit dollars: Markdowns = 4% of net sales = 0.04 * $220,000 = $8,800 Profit

= 9% of net sales = 0.09 * $220,000 = $19,800

Reductions = Employee Discounts + Markdowns + Shortages = $2,100 + $8,800 + $1,900 = $12,800 Initial Markup % =

Expenses + Profit + Reductions + Alteration Costs - Cash Discounts Net Sales + Reductions =

$95,000 + $19,800 + $12,800 + $2,600 - $5,400 $220,000 + $12,800

=

$124,800 $232,800

= 53.61%

Practice Problems • Exercise 5.4 1. What should be the initial markup percent in a department having these planned figures? Net sales Markdowns Shortages

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$55,000 $3,000 $700

Employee discounts Expenses Profit

$400 $15,000 $9,000

2. Determine the initial markup percent needed on the basis of the following figures: Net sales

$21,000

Profit

$2,300

Expenses

$7,500

Shortages

$300

Employee discounts

$200

Alteration costs

$150

Cash discounts

$280

3. Determine what initial markup percent will be required to achieve a 4.25% profit. Expenses

42.0%

Markdowns

2.8%

Shortages

1.0%

Employee discounts

0.5%

Cash discounts

0.3%

Alteration costs

0.2%

4. What should be the initial markup percent in a department having these planned figures? Net sales Expenses Markdowns Alteration costs

$420,000 38% $8,500 $950

Shortages

$2,500

Cash discounts

$1,600

Employee discounts

$1,900

Profit

8%

5. A department has planned net sales of $220,000, expenses of $85,000, reductions of $18,000, cash discounts of $1,800, and alteration costs of $3,200. Determine what initial markup percent will result in a 7% profit.

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Cumulative Markup Although cumulative markup is an average markup, it is discussed in a separate section because it is a special type of markup. Cumulative markup is the average markup resulting from the markup on the beginning inventory and the purchases received during a specified period. Calculated on a season-to-date basis, cumulative markup is an average figure, since it is the markup on merchandise that has accumulated over a certain period. Refer to Chapter 7 for more information about calculating cumulative markup. Cumulative dollar markup is the difference between the total delivered cost and the total retail price of all merchandise handled during a given period. Total value of goods handled is calculated by adding beginning inventory and net purchases throughout the period. Total merchandise handled must be calculated at retail and at cost in order to find cumulative markup percent, which is determined by dividing cumulative dollar retail into cumulative dollar markup. Cumulative dollar retail is the beginning inventory plus receipts. Cumulative Markup % ⴝ $ Cumulative Markup ⴜ Cumulative Retail

Example 5-24 The shoe department showed an opening inventory of $80,000 at retail with a markup of 48%. During the month, purchases were received in the amount of $30,000 at cost that were marked up 52%. Find the cumulative markup percent for the department. Opening Inventory

Purchases

Total Merchandise Handled

$80,000

(a) $62,500

(c) $142,500

(b) $41,600

$30,000

(d) $71,600

52%

(e) 49.75%

Retail Cost

48%

Markup %

Solution: (a) Find the retail value of purchases: Retail = $30,000 , (100% - 52%) cost % = $30,000 , 48% = $62,500 (b) Find the cost value of opening inventory: Cost = $80,000 * 100% - 48% cost % = $80,000 * 52% = $41,600 (c) Find the total retail value for all goods handled: Total retail value = $80,000 + $62,500 = $142,500 (d) Find the total cost value for all goods handled: Total cost value = $41,600 + $30,000 = $71,600 (e) Find the markup % on the total goods handled: $ Markup = $142,500 - $71,600 = $70,900 Markup % = $70,900 , $142,500 = 49.75% 128

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Practice Problems • Exercise 5.5 1. On May 1, the children’s department had an opening inventory of $48,500 at cost with a markup of 42%. During the month, the buyer purchased additional merchandise that cost $38,000 with a 46% markup. Calculate the cumulative markup percent for the department at the end of May.

2. The buyer in the fashion jewelry department received a report showing an opening inventory for September 1 of $58,000 at cost with a markup of 47%. Merchandise with a retail value of $50,000 with a 51% markup was received into the department during the month. Find the cumulative markup percent for September.

3. On August 1, the home-furnishings department showed an opening inventory of $192,000 (retail) with a markup of 54%. During the month, merchandise costing $59,048 with a 60% markup was received into the department. What was the cumulative markup percent?

4. A sporting goods store had an opening inventory of $42,000 at cost and $95,000 at retail. Purchases during the month totaled $64,000 at cost and $138,000 at retail. Determine the cumulative markup percent.

5. On July 1, the housewares department showed an opening inventory of $90,000 at retail with a 54% markup. During July, purchases were received in the amount of $40,000 at cost and were marked up 51%. Find the cumulative markup percent.

Maintained Markup Maintained markup is the final markup obtained by a retail store when the merchandise is sold. Maintained markup is based on the actual sale of goods rather than on planned sales. Maintained markup is the difference between the gross cost of the goods sold and the actual retail price obtained (net sales). The markup initially planned by the buyer may be quite different from the maintained markup actually realized when the goods are sold to the customer. Retail reductions (markdowns, stock shortages, and discounts) reduce the retail value that can actually be achieved. Maintained markup is based on results and is usually figured on the Markup as a Merchandising Tool

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activity of an entire classification, department, or store for a given period, rather than on an individual purchase or a few items. Maintained markup is calculated whenever an operating statement is prepared and is reported as a percent. Refer to Chapter 7 for more information about calculating maintained markup. Maintained markup is the difference between net sales and gross cost of merchandise sold. It is expressed as a percent of net sales and does not reflect deductions for cash discounts and workroom costs. Maintained Markup $  Net Sales  Gross Cost of Merchandise Sold Maintained Markup %  Maintained Markup $  Net Sales $ When IMU% and retail reductions are known: Maintained Markup %  Initial Markup %  [Reductions : (100%  Initial Markup %)] Maintained markup and initial markup percents are both calculated on a retail base, but they are not based on the same retail figure. Initial markup is based on the first retail price placed on merchandise, and maintained markup is calculated on net sales. Initial markup is planned in advance and is calculated on merchandise as it is received in the store. The buyer cannot determine maintained markup in advance, because it is based on actual retail sales and, therefore, is the result of merchandising activities. Maintained markup is a more meaningful percent than initial markup because it is an accurate reflection of actual business.

Example 5-25A Determine the maintained markup percent using the following operating results: Net sales

$250,000

  Cost of merchandise sold   Opening inventory   Gross purchases    Less, returns to vendor

$35,000 $155,000 - 7,500

  Net purchases

$147,500

  Freight inward

+ 3,500

   Total merchandise handled

$186,000

  Closing inventory

- 41,000

Gross cost of merchandise sold

$145,000

Maintained markup and gross margin each represent the markup achieved after the merchandise is sold. Both percentages are based on the net sales figure rather than on original retail prices. As will be emphasized in Chapter 7, gross margin is the difference between net sales and total cost of goods sold. Maintained markup, as just illustrated, is the difference between net sales and gross cost of merchandise sold. Gross Margin $  Net Sales  Total Cost of Merchandise Sold Gross Margin %  Gross Margin $  Net Sales It is important to remember that maintained markup differs from gross margin in that gross margin takes into consideration cash discounts and alteration/workroom costs. When a retailer does not incur cash discounts and alteration/workroom costs, gross margin and maintained markup are the same. Therefore, when cash discounts and alteration/workroom costs are not directly addressed in the retailer’s accounting of merchandise costs, the maintained markup percent equals the gross margin percent. 130

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When retailers have cash discounts and alteration costs, these factors must be considered in figuring gross margin. Example 5-25B demonstrates how this works. Gross Margin ⴝ Maintained Markup ⴙ Cash Discounts ⴚ Alteration/Workroom Costs Applying this formula in Examples 5-25A and 5-25B yields gross margin of $110,500 = ($105,000 + $8,000 - $2,500).

Example 5-25B Using the same numbers from Example 5-25A, find gross margin and gross margin percent. $250,000 Cost of merchandise sold Opening inventory

$ 35,000

Gross purchases

$155,000  7,500

Less, returns to vendor Net purchases

$147,500

Freight inward

 3,500

Total merchandise handled

$186,000

Closing inventory

 41,000

Gross cost of merchandise sold

$145,000

Cash discounts earned

 8,000

Net cost of merchandise sold

$137,000

Net alteration/workroom costs

 2,500  139,500

Total cost of merchandise sold

$110,500

Gross margin

Solution: Gross Margin $ = Net Sales - Total Cost of Merchandise Sold = $250,000 - $139,500 = $110,500 Gross Margin % = Gross Margin $ , Net Sales = $110,500 , $250,000 = 44.2%

Practice Problems • Exercise 5.6 1. Given the following figures, determine (a) the maintained markup percent and (b) the gross margin percent: Net sales

$200,000

Gross cost of merchandise sold

$102,500

Cash discounts

$3,500

Alteration costs

$1,500

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2. Calculate (a) the maintained markup percent and (b) the gross margin percent with the following figures: Net sales

$890,000

Cash discounts

$6,000

Alteration costs

$2,500

Gross cost of merchandise sold

$420,000

3. Calculate the maintained markup percent for a department under the following conditions: Net sales

$75,000

Opening inventory

$37,000

Closing inventory

$38,000

Net purchases

$46,000

Freight inward

$1,400

Cash discounts

$2,400

4. The housewares department had a gross margin of $88,200, cash discounts of $6,200, and alteration costs of $2,400. If the net sales were $220,000, what was the maintained markup percent?

5. Determine (a) the maintained markup percent and (b) the gross margin percent for a department with the following figures: Net sales

$320,000

Opening inventory

$85,000

Closing inventory

$105,800

Net purchases

$185,000

Freight inward

$3,800

Cash discounts

$5,400

Alteration costs

$2,100

Definitions Definitions

Average Markup – The average of markups working with total cost and total retail. Markups can be averaged on an entire stock of goods, a single purchase, or a group of purchases. Billed Cost – The cost after quantity and/or trade discounts are deducted, but before cash discounts are deducted.

Cost Complement – The difference between retail percent (100%) and markup percent. 132

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Cumulative Dollar Markup – The difference between total cost price and total retail price of all merchandise handled during a specific period. Cumulative markup is an average figure for merchandise classifications, departments, or the entire store. Cumulative Dollar Retail – The difference between total delivered cost and total retail price of all merchandise handled during a given period.

Cumulative Markup Percent – The difference between the cumulative dollar markup and the cumulative dollar retail. Gross Cost of Merchandise Sold – The difference between the cost value of total merchandise handled and cost value of the ending inventory. Gross Margin – The difference between net sales and total cost of merchandise sold. Since cash discounts and workroom costs are taken into consideration in computing gross margin, the figure is not the same as maintained markup. Initial Markup – The difference between the cost price and the original retail price of merchandise. Initial markup does not reflect markdowns or stock shortages. Keystone Markup – A markup that doubles the invoiced cost of merchandise. Keystone markup provides a retail price that is twice the amount of the cost price. Maintained Markup – The difference between net sales and gross cost of merchandise sold. Maintained markup is expressed as a percent of net sales and does not reflect cash discounts or workroom costs. Maintained markup represents the actual markup achieved for a selling period.

Markon – A term often used interchangeably with markup. Markon most often indicates the total amount added to the cost of the total merchandise in a department, rather than to the amount added to individual items. The term markon is used more often in manufacturing, whereas markup is used in retail merchandising. Markup – The difference between the cost price and the retail price of merchandise. Markup may be expressed in dollars or as a percent. If stated as a percent, it may be based on either cost price or retail price. Most retailers base markup on retail price. Retail Reductions – Factors that reduce the retail value of a merchandise assortment. These factors are markdowns, discounts to employees and special customers, and stock shortages. Sell-Through Percent – A comparison of the amount of merchandise that was sold during a certain period with the amount of merchandise that was on hand during the same time period. Total Cost of Goods Sold – The net cost of merchandise sold with the addition of any alterations or workroom costs.

Summary Problems Chapter 5 • Summary Problems

1. Determine the cost of a jacket that retails for $249 and has a 49% markup.

2. Find the retail price of a sofa that cost $900 and was marked up 62%.

3. What is the markup percent for braided belts that cost $78 a dozen and retail for $12 each?

4. Find the markup percent on a suit that costs $350 and retails for $680.

5. A buyer purchased ties at $90 a dozen. What should be the retail price for each tie in order to achieve a 48% markup?

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6. Determine the markup percent for the following group of merchandise: Item Quantity

$ Cost

$ Retail

15 chains

22.00 each

50.00 each

27 bracelets

96.00 per dozen

18.00 each

2 1>4 dozen pins

54.00 per dozen

8.00 each

30 charms

6.50 each

12.00 each

7. A buyer plans to purchase $25,000 (retail) worth of children’s coats for a back-to-school sale. He has already purchased 180 coats that cost $45 each and will retail for $80 each. What markup percent must be obtained on the balance of coats in order to average a 44.5% markup?

8. During July, a buyer plans to buy gowns with a retail value of $10,000. She has purchased 150 gowns at $15.00 each that will retail for $35.00. What markup should she obtain on the remaining gowns in order to achieve a 47.5% markup goal?

9. A menswear buyer needs 84 shirts to retail at $18 each and 52 pairs of slacks to retail at $35 each. He needs to average a 47.5% markup. If he pays $9.50 for each shirt, how much can he pay for each pair of slacks in order to achieve his planned markup percent?

10. A buyer plans to purchase 250 towels for the store’s harvest sale and to retail each towel for $7.50. He has placed an order for 128 towels that cost $3.25 each. What is the most he can pay for each of the remaining towels if he wishes to average a 42% markup?

11. The sportswear buyer purchased 22 blouses at $15.00 each, 15 blouses at $12.50 each, and 27 blouses at $126 per dozen. The average markup must be 50%. What should be the retail price for each blouse if all blouses are to be sold at the same price?

12. A buyer needs to average a 44% markup. She has purchased 25 flannel robes that cost $18.50 each and 32 fleece robes that cost $24 each. If she retails the flannel robes for $29 each, what must be the average retail for each fleece robe in order to achieve the planned markup percent?

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13. The following figures have been planned for a department: Shortages

1.0%

Employee discounts

2.0%

Markdowns

4.6%

Expenses

30.0%

Profit

6.0%

Alteration costs

0.9%

Cash discounts

1.4%

Calculate the initial markup percent that should be used in order to arrive at the planned figures.

14. Calculate the initial markup percent that will be required to achieve a 6% profit, using the following figures: Net sales Employee discounts Expenses Markdowns

$540,000 $2,900 $180,000 $8,250

Alteration costs

1.2%

Cash discounts

$6,550

Shortages

$1,800

15. Determine the initial markup percent for a children’s department with these figures: Net sales

$270,000

Expenses

$92,500

Profit

5%

Employee discounts

$2,100

Shortages

$1,550

Cash discounts

$5,500

Markdowns Alteration costs

3% $3,500

16. The sportswear department had an opening inventory of $95,000 at cost with a markup of 45.5% on March 1. During the month, the buyer for the department purchased additional merchandise with a retail value of $50,000 with a 48% markup. Calculate the cumulative markup percent for March.

17. The opening inventory for the boys’ department on March 1 was $150,000 at cost and $260,000 at retail. During the month, the department received merchandise that cost $95,000 with a 51% markup. Find the cumulative markup percent.

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18. The net sales for a shoe department were $650,000. Calculate the maintained markup percent if the department has the following figures: Net purchases

$350,000

Opening inventory

$175,000

Closing inventory

$220,000

Cash discounts

$8,500

Alteration costs

$4,200

Freight inward

$5,000

19. The home-furnishings department had net sales of $420,000 and gross cost of merchandise sold of $187,500. The department’s cash discounts were $3,800 and alteration costs were $2,450. Determine the maintained markup percent and the gross margin percent.

20. A gift shop had a 42.5 % maintained markup. The shop did not incur any alterations or workroom costs and there were no cash discounts. Net sales were $420,000. What was the gross margin percent?

Case Study 1 How Can the Buyer Determine Average Cost? Marine Aghekyan, Ph.D California State University at Long Beach Jennifer has recently graduated from a university with a degree in Fashion Merchandising and has started her career as a buyer in a midsize women’s apparel store in Long Beach, California. Through her educational pursuits, Jennifer worked as an intern in two different retailers as an assistant buyer. During the internship experiences, she was able to apply many of the mathematical concepts that she had learned in her merchandising courses. Jennifer’s internships were very successful, and she feels excited and confident in her new position as a buyer. The retailer where Jennifer is working as a buyer sells high-quality women’s apparel and has been operating

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successfully for over 25 years. The owner tries to offer unique designs projecting a prestigious image. The retailer’s niche market focuses on professional women who are highly educated, fashion conscious, and trendy. The retailer has developed a large number of loyal customers and has good working relationships with local vendors from whom it has bought merchandise for over 25 years. For the upcoming season, Jennifer needs to buy 30 skirts to retail $192.00 each, 20 jackets to retail $352.00 each, and 40 dresses to retail $380.00 each. Jennifer also knows that the store markup goal is 60%. She has a budget of $10,500.00 (cost) for the entire purchase. Jennifer has

visited different vendors already. She plans to buy the 30 skirts that cost $120.00 each from a new vendor and the 20 jackets that cost $220.00 each from the vendor to whom the store has a very long business relationship. Jennifer still needs to buy 40 dresses. She visited a new vendor and found dresses that cost $98.00. She thinks that these dresses fit the retailer’s image and will be liked by the customers.

2. In order to calculate the maximum amount Jennifer can pay

DISCUSSION QUESTIONS FOR CASE STUDY 1

4. Is Jennifer having a problem in her budgeting? If yes,

1. Using the information provided above, determine the total needs at retail.

for the dresses, she needs to know the total needs at cost. If you were Jennifer how would you calculate total needs at cost?

3. Having done all the calculations, how can Jennifer identify unit cost for each dress? What is the most Jennifer can pay for each dress? If you were Jennifer would you purchase the $98.00 dress from the new vendor? explain why. What would you recommend her to solve the problem?

Case Study 2 Calculating Initial Markup and Average Markup Tammy Robinson, Ph.D. and Farrell Doss, Ph.D. Radford University Christy Williams is a recent graduate from Mason College, where she majored in Fashion Merchandising. After several interviews, she was pleased to accept a job as Assistant Store Manager at Kayla’s Specialty Store, a small specialty store that sells women’s apparel and accessories. She assists the owner, Mrs. Allen, with purchasing and pricing merchandise. On the fall buying trip, Mrs. Allen purchased two items from one vendor. They included 2 dozen sweaters for the fall season with a cost price of $32 and 3 dozen coordinating blouses with a cost price of $24. Although Mrs. Allen felt strongly about these purchases, she did not find a selection of skirts and pants from this vendor to meet her customers’ needs. During the same buying trip, Mrs. Allen discovered a new vendor and was able to secure a great deal on some skirts and pants that can be grouped with the sweaters and blouses on the sales floor. Twelve skirts were purchased for a cost of $20 each. They will retail for $42 each. Also purchased were 18 pairs of pants for $18 each, which will retail for $38 each. Mrs. Allen has asked Christy to calculate the average markup of this group to ensure the store’s planned markup of 51.6% will be met.

After reviewing the store’s figures, Christy produced the following numbers: During the last quarter, expenses have averaged 35%, markdowns have averaged 12%, and profit has averaged 4.5%. The store’s planned sales are $325,000. Using this information, Christy must determine the initial retail price of the new fall sweaters and blouses. DISCUSSION QUESTIONS FOR CASE STUDY 2

1. Using the information provided by Christy, determine the initial markup percent and the initial retail price for the new fall sweaters and blouses.

2. Using price information calculated in Question 1, state what actual retail price Christy might suggest for these fall sweaters and blouses and why she would suggest that price.

3. What would be the average markup percent for this grouping of sweaters, blouses, skirts, and pants?

4. The store wants to achieve a 51.6% markup. How does the average markup, that was calculated in Question 3, compare to the store’s goal? What can be done to help bring the markup percent closer to the desired goal?

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Case Study 3 Operating a Successful Bridal Business Wanda K. Cheek, Ph.D., Mississippi State University You are the owner of a soon-to-open bridal store in a college town, with a population of 45,000. You began work on the business plan over a year ago, but are now within six months of the grand opening. It is time to make serious decisions concerning the financial aspects of merchandising a fashionoriented business. Understanding markup and competitive retail pricing is an important part of the successful operation of this business. Many merchandising and retailing students do not understand the unique structure of the retail bridal business and how it is different from most fashion businesses. The following background information is presented to clarify the differences. First, to get into the retail bridal business, a bridal business owner carefully researches specialized bridal markets for dresses and accessories, such as the National Bridal Show at The Merchandise Mart in Chicago. There are two specialized bridal markets per year: (1) fall market in September or October for upcoming spring/summer weddings [merchandise arrives in stores in January and February] and (2) spring market in March or April for upcoming fall/winter weddings [merchandise arrives in stores in August and September]. Most bridal businesses make most purchases at fall market, since the upcoming spring and summer wedding season is by far the largest selling season of all. Business profits hinge on the success of sales during this season. Another major difference in the bridal business, compared to other fashion retailing business structures, is that the owner only purchases sample dresses at the market. Therefore, inventory expenditures are greatly reduced, because a small store such as yours will only have about 80–90 dresses hanging in stock. Since all will be sample dresses that any bride may choose, it is important to specify sizes that can be pinned up or expanded as needed. Therefore, sizes 10, 12, 14, and 16 are popular sample sizes, with a few styles for larger sizes (up to 26). Small sample sizes such as 2 and 4 would most likely be the least useful. Therefore, sales persons need to be experienced and proficient in measuring and determining actual sizes to order. Because the dresses will then need to be sewn by the manufacturer, bridal gown orders should ideally be placed

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at least six months in advance of the wedding to allow for arrival and alterations. At a minimum, gowns take three to four months for completion and delivery, depending on the designer. Rush orders are available for an extra fee, but six to eight weeks is usually required. Thus, order completion time is slow. To discourage brides who change their minds, a 60% nonrefundable deposit is generally required at the time the order is placed. Thus, return on investment in sample size stock is slow. However, since most orders will be custom, the trade-off is that markdowns on bridal gowns will be almost limited to the markdowns on sample gowns that are sold at the end of the order season (generally January and July sales). In the trade (wholesale and retail), markup on bridal gowns is often discussed in terms of markup based on cost, rather than markup based on retail. Earlier in this chapter, keystone markup was defined as a markup that doubles the cost of the merchandise. Thus, for keystone markup, a 2.0 factor is used since the retail price is twice the cost. Bridal owners often use a markup that is more than a 2.0 factor, such as a 2.5 factor or even greater (3.0). This means that the wholesale cost is multiplied by 2.5 or 3.0, etc., to determine the $ Retail. In effect this is the same as doubling (or tripling with a factor of 3.0) the wholesale cost and adding an additional amount to ensure profitability. It is important to remember that the retail markup percent can be calculated from this information. In the bridal business, an ideal $ Retail is based on an Initial Markup (retail) % of 60% or a 2.5 factor. Other issues in the bridal business that impact profitability and markup are transportation and alterations. In the bridal business, these expenses are pricey, compared to expenses in other types of fashion retailers. The current cost for shipping for each dress is about $20. Simple alterations begin at $40 for hemming and a bust adjustment for strapless gowns, depending on the area of the country, and prices go from that point. As the owner of the business, you must decide whether you will build these expenses into markup. In some bridal stores, each of these is added as an extra expense to be paid by the bride above the quoted $ Retail. The pricing philosophy is that treating these separately keeps the $ Retail price competitive.

DISCUSSION QUESTIONS FOR CASE STUDY 3

2. Using the figures below, determine the $ Retail based on cost and the Retail Markup % Equivalent for dress style # 1001. Calculate the answers manually and then by spreadsheet.

1. Determine the Retail Markup% for a famous brand gown with a wholesale cost of $650 and a manufacturer’s suggested retail price of $1,600. Then calculate the markup factor based on cost.

Calculating Markup Based on Cost and Determining Retail Markup% Equivalent Dress Style# 1001

Dress Description

Wholesale Cost

Markup Factor based on cost

Strapless ivory polyester

$250

2.1

$ Retail based on cost

Retail Markup % Equivalent

2.5 3

3. For the same dress style# 1001, calculate the $ Retail assuming a 60% retail markup. Then add a transportation charge of $20 and an alteration charge of $40 to determine the final cost to the bride.

4. In reference to question #3, what do you think is the best method for a final $ Retail for the bridal gown? (a) Continue to mark the $ Retail at $625 and collect a separate charge of $20 for transportation and arrange a final fitting session with an alterations person in your store but let the bride pay that person’s charge directly to him/her OR (b) Increase the $ Retail to include both a standard alteration charge and a standard delivery charge. Discuss the pros and cons of each.

5. Since markup percentages can be “controlled” in the bridal market through manufacturer’s suggested prices and bridal is a seasonal market, what are some additional product categories (other than bridal gowns) that you could offer in your store to improve maintained markup and also offer the customer a full-service, one-stop package?

6. Since bridal retailers often refer to markup in terms such as 2.1 or 2.5, based on cost, why should a student of retail merchandising know how to calculate markup based on both $ Retail and $ Cost?

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RETAIL PRICING for PROFIT OBJECTIVES • To understand the importance of pricing in the operation of a successful retail business. • To understand the factors that affect retail pricing. • To recognize the types of price adjustments and to understand the importance of price changes in profitable merchandising. • To analyze the causes of markdowns and to understand the relationship between the timing and the amount of markdowns. • To calculate sell-through and to understand the effect of sell-through on pricing. • To calculate dollar markdown and markdown percent. • To calculate markdown cancellation, additional markup, and additional markup cancellation. • To determine net markdown. • To calculate discounts to employees and special customers. KEY POINTS • One of the important factors in successful merchandising is offering merchandise at the right price. • Retail pricing serves as a major tool in selling goods. • Maximizing profit requires a consideration of the relationship among customer demand, retail price, and expenses. • Pricing policies relate to many variables that contribute to the company’s image. • Pricing must be responsive to market conditions.

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Career Corner Web Analyst Neiman-Marcus, Inc.

online business trends and goals on a daily basis to evaluate site productivity.

Description of Job Responsibilities

Career Path

As a Web Analyst for NeimanMarcus.com and its subsidiaries, BergdorfGoodman.com, Horchow.com, Last Call.com, and Cusp.com, I depend on my analytical and project management skills to assure Web site productivity. I am also continuously involved in Web analytics and implementation of site redesigns and launches, which includes creating detailed tagging requirements for our developers and testing guidelines for our quality assurance team. In addition, I coordinate daily with internal clients including our Lauren Rogers/Neiman Marcus Marketing Department and Web Merchandising Team for the purpose of managing any ad hoc report requests, while consistently maintaining ongoing standardized reporting.

Prior to my current position as a Web Analyst, I was the Assistant Department Manager for Jewelry and Accessories on NeimanMarcus.com. In that role, I coordinated with our buying office, creative team, production team, photographers, copy writing team, Web merchant team, and vendors on a daily basis to assure that products were received, photographed, and loaded to NeimanMarcus.com correctly. I also worked with these departments, as well as our Marketing Department, to assist with the execution of online promotions by developing detailed timelines for vendors, the buying office, and the creative team to assure a successful launch. As an Assistant Department Manager, I was introduced to Omniture Sitecatalyst, which I used daily to merchandise products to optimize conversion and analyze and track effects of site changes, as well as track promotional events and e-mails.

Lauren Rodgers

Relevance of Merchandising Mathematics In my position, my merchandising mathematic and analytic skills are put to the test. My responsibilities include analyzing

Advice for Students Interested in Merchandising Careers Never underestimate the value you gain while in your college classes. My classes created a solid foundation, allowing me to successfully continue on in this field. Take full advantage of all the resources available to you as a student. Your professors are experts in this field and are there to guide and teach you, so do not let that opportunity pass you by.

Retail Objectives and Pricing One of the major objectives in successful retailing is to offer merchandise at the right price. Retailers must be familiar with many pricing strategies when providing goods to the consumer. Retailers also must plan and analyze prices of merchandise carefully to provide consumers with the right merchandise and obtain a desirable profit. Today’s consumers are faced with the availability of a diverse group of retail formats for purchasing merchandise. With increased competition in the industry, price often serves as a major motivation for consumer buying practices.

Pricing Policies and Retail Image Pricing policies affect the success of a retail establishment. Retailers must analyze and plan prices carefully in order to achieve a profit. The right price for a retailer should be a price that not only covers both the cost of the merchandise and operating expenses, but also provides a profit. In some instances, the retail price may not provide a “typical” profit, but the goods are carried because they generate traffic and contribute to the sale of other merchandise.

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All retailers operate with pricing policies that serve as guidelines in making sure that a reasonable profit will be attained. Pricing policies are used to determine the price levels at which retailers sell their merchandise. Pricing policies vary among companies depending upon what type of image the retailer wishes to project, and are important guidelines in determining the types of customers the retailer will attract. Although there are numerous pricing policies, only the five most common will be examined here: 1. Prestige Pricing 2. Leader Pricing 3. Competitive Pricing 4. Everyday Low Pricing (EDLP) 5. High/Low Pricing Pricing and other issues, such as the company’s image, the level of personal service provided, and the variety of goods and services offered, are important strategic variables in determining where consumers decide to shop. Prestige pricing, or above-the-market pricing, is used by some retailers to feature luxury, elite, innovative, or exclusive merchandise projecting a prestigious image. Retailers that carry exclusive items, sell highquality goods, and offer a high level of personal service are looking to attract prestige or status-minded consumers. This type of customer is willing to pay a higher price in order to receive specialized attention and purchase unique, fashionable, and quality items. Further, the uniqueness and exclusivity of goods reduces the consumer’s ability to compare prices. Therefore, this type of retailer may employ prestige pricing, with higher prices than those of competitors. Designer boutiques as well as upscale department stores and specialty stores like Saks Fifth Avenue and Neiman Marcus are often successful with a prestige pricing policy. These companies provide a luxury retail image through a store environment that has a high level of customer service, innovative fixtures and visuals, and upscale promotions. It is not uncommon for these stores to hold spectacular special events and promote designers through in-house appearances or trunk shows. Leader pricing occurs when a retailer offers brand-name merchandise at special, reduced prices. The purpose is to attract consumers to the store through well-known products sold at low prices, with the hope that customers will purchase additional, regularly priced items. Discount department stores, toy stores, supermarkets, and home centers are some of the retailers that utilize leader pricing to attract customers. If merchandise is priced below cost, it is referred to as a loss leader—a lowpriced good on which retailers make little or no profit. While customers are in the store for these lower priced goods, retailers expect that other merchandise at regular prices with higher markups will also be sold and that customers may instead purchase a higher priced version of the discounted product. For example, a retailer may offer a basic model of an electronic device at an exceptionally low price, expecting, and possibly encouraging, customers to determine that the basic electronic model doesn’t have the necessary features or functions and to opt for a higher priced model more suited to their needs. Competitive pricing, also known as at-the-market pricing, involves retailers pricing comparable products exactly at or near the same price as competitors’ prices for those products. Retailers with competitive pricing generally have average prices and offer solid service. Due to the increased number of retailers selling comparable merchandise, customers are willing to shop around in order to obtain the lowest price. Internet shopping has dramatically increased consumers’ ability to make price comparison. Therefore, it is especially important for nationally distributed brand-name merchandise,

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whose prices can be readily compared by customers, to be offered at competitive prices. Traditional department stores, supermarkets, and many drugstores employ this type of pricing strategy. In a version of competitive pricing, companies advertise their willingness to meet or beat their competitors’ prices. The advertisement lures consumers into believing that the retailer offers the lowest prices. Although retailers that use this pricing policy are willing to make price adjustments for customers who demand the concession, their products may be initially priced somewhat higher than those of other competitive stores. Everyday low pricing (EDLP) is a way that retailers can achieve increased sales volume and markup dollars. EDLP can be defined as a pricing policy that sets prices somewhere between the lowest discounted sale price and the regular, nonsale price of competitors. A better term for this type of strategy would be stable pricing, because prices often do not vary. Promotions typically focus on features, assortment, and value rather than reduced prices. Retailers are able to obtain a satisfactory profit with a lower markup by reducing costs and expenses and limiting assortments of merchandise. A small difference in price may make a big difference in sales volume and profits. However, retailers claiming everyday low prices—such as Walmart, Home Depot, and Amazon.com—do not necessarily have the lowest prices. High/low pricing is another policy retailers may use, depending on their particular strategy. High/low ­pricing consists of retailers providing prices above the EDLP of competitors and offering special sales that decrease those prices. The special sales usually occur frequently and for short periods in order to increase consumer interest. Often, these retailers carry a sizable amount of private-label merchandise, allowing them to take deeper price cuts without greatly reducing their overall gross margin. As consumers become more price conscious, high/low pricing provides a means of generating consumer interest and customer traffic. High/low pricing is used by highly promotional retailers that regularly feature special, discounted prices. Retailers such as Kohls often use the high/low pricing strategy to increase traffic in their stores and for their online business by extensively marketing sale events.

Factors That Affect Pricing Because pricing has a major impact on the retailer’s operations and company image, merchandisers carefully consider factors that influence prices. Brands play a major role in pricing. Many retailers continue to sell designer brands and national brands (manufacturers’ brands that are available nationwide). Private-label ­merchandise is often priced below manufacturers’ brands, allowing the retailer to be more competitive. ­Private-label merchandise typically costs less and carries higher markups, which increases profits. In addition, private-label merchandise offers customers more distinctive assortments of goods and allows retailers to have greater control over their merchandise while building brand and, therefore, store loyalty. Further, private-label goods do not allow consumers to shop prices the way they can with designer and manufacturer’s brands. Several other factors that influence the determination of retail prices for the retailer’s target customer are as follows: 1. Type of merchandise. The quality and perishability of the goods, exclusivity of the products, and ­markdown risks. 2. Competition. The price of identical or similar merchandise offered by competitors. 3. Manufacturer’s policies. The prices suggested or required by the manufacturer. 4. Selling costs. The need for a professional salesperson or for a large commission to sell the merchandise.

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5. Demand and supply. The availability of goods and the customers’ interest in the merchandise. 6. Handling costs. The expenses involved in warehousing, assembling, altering, and delivering the merchandise.

Price Consciousness Retailers must price merchandise carefully in order to satisfy customers and achieve a profit. The retail price of merchandise serves to attract and maintain customer patronage. However, the type of customer who is attracted depends on the store’s proposed image and assortment of goods, as well as on consumers’ perceptions of price–quality relationships.

The Right Price for the Consumer Often, consumers associate prices with the quality and appeal of the product. If a price is low, the consumer may associate the low price with poor quality. Conversely, if a price is high, consumers may perceive the product as a high-quality item. However, most consumers are searching for a “good value.” Good value varies according to the consumer’s own expectations; therefore, good value is difficult to define. Generally, good value is defined as the value or worth of a product that is of good quality and with an appropriate price that reflects the degree of quality. Most consumers are looking for the best quality at the right price. However, this judgment is based on the consumer’s individual subjective opinion; therefore, finding the correct mix of quality and price is quite difficult. Today’s consumers are well-informed, educated shoppers. They have access to many resources to help determine which purchases are good values. Many consumers have Internet access. In addition to the vast array of Internet retailers, virtually all large store-based retailers have Web sites. With the availability of the Internet, many consumers are price conscious and tend to do comparison shopping. Today, large numbers of consumers use technology and a variety of means to make informed purchasing decisions. Some manufacturers are bypassing retailers and selling directly to consumers either through the Internet, by direct mail, or through company-owned stores. Specialty companies offer online items once considered unique, allowing consumers to compare prices easily. With increased competition, customers have more choices regarding where to buy their goods. Therefore, retailers need to be aware of competitors’ merchandise offerings and pricing policies.

The Right Price for the Retailer The right price for a retailer should be a price that covers the cost of the merchandise plus operating expenses, while still providing a fair profit. Sometimes low-markup goods are carried by retailers because they generate traffic and contribute to the sale of other merchandise. Stores may offset this low markup by placing higher markups on other goods. However, the retailer has to find the right balance. What the retailer would like to charge is not always what customers are willing to pay. Ideally, to determine the best price, retail buyers should ask themselves, “What is my customer willing to pay for this item?” If the customer is not willing to pay a price that provides the retailer sufficient gross margin, the product is not a wise selection for the business, and the buyer must find alternative goods. Because the “right price” must cover operating expenses, chain-store buyers take into account variations in operating expenses from one location to another when determining prices. Buyers must average the operating expenses and select a single price for all markets or develop tiered pricing based on market variations.

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Price Lines and Zones A store’s pricing structure is set by management as part of the company’s established merchandising policies. Management must first decide who will be the target customer and then establish price lines or price zones to appeal to that customer. Price lining is a technique used by retailers to determine the particular prices at which their merchandise is offered for sale. In this process, the pricing structure is related to the buying power of the target customers, who are divided into groups. Some customers may prefer to purchase merchandise priced in the lower price zone, others shop in the middle price zone, and some seek the highest price zone. Care must be taken in initially establishing the pricing structure. Upward adjustments to an established pricing structure provoke serious resistance and alienate existing customers. The retailer develops price lines, price ranges, and price zones for the different merchandise classifications carried in the store. In pricing, it is important to understand the following terminology: Price Line or Price Point. A specific predetermined price at which an item is offered for sale. For example, if a store offers women’s dresses at $89, $99, $129, and $159, each specific price represents a price line or price point. Price Range.

The spread between the highest and lowest price line offered for sale. In the previous

example of women’s dress price lines, the price range is $89 to $159. Price Lining.

The practice of predetermining the price lines or price points at which an assortment of

merchandise will be offered for sale. The buyer does not price the merchandise at all possible prices but seeks merchandise that can be sold to the customer at predetermined prices. For example, if a buyer knows that their customers readily purchase dresses that are priced at $99, the buyer will search the market for an assortment of dresses that can be profitably priced at $99. Price Zone.

A series of price lines that are relatively close together and tend to appeal to a certain group

of customers. Most stores maintain two or three of the following price zones: promotional (lower price lines), moderate (middle price lines), and prestige (higher price lines). Some retailers use the terms good, better, and best to describe price zones. Merchandise is offered for sale at several price lines within each of the price zones. For example, the group of dresses priced at the price lines of $89, $99, $129, and $159 would be within the moderate or better price zone. There should be enough spread between the different price lines so that customers can see the quality–price relationships of various assortments of merchandise. In the example of the dresses, there should be distinguishable differences in quality and styling between the various price lines—particularly between the $89 and $159 price lines. The best-selling price lines provide a greater share of the total dollar and unit sales. If the $99 price line of dresses proved to be the best seller, the buyer, recognizing the impact of this price line on overall sales, would want to purchase larger quantities in that price line and offer a greater assortment of products in that line.

Pricing Related to Consumer Demand Although most buyers have an initial markup percent goal, maximizing dollar markup must be a priority. Expenses are paid in dollars, and a trade-off may be made between taking a higher markup percent and selling larger quantities. The following example illustrates a theoretical situation, whereby a lower markup percent stimulates customer demand and increases markup dollars and profit:

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Example 6-1 Retail

100 units at $22 = $2,200

300 units at $15 = $4,500

Cost

100 units at $10 = 1,000

300 units at $10 = 3,000

Markup

(54.55%)

(33.33%)

Expenses Profit

1,200

1,500

1,050

1,250

$150

$250

Increasing total profit dollars by decreasing markup percent is appropriate for merchandise that has great elasticity of demand—in other words, for merchandise such that the number of units sold will increase dramatically as the retail price is lowered. Typical of this kind of merchandise is that noted in Example 6-1. If, in the same example, the unit price decreased to $15, but the sales increased only to 200 units, the resulting markup of $1,000 would have failed to cover the expenses, yielding a $250 loss. Therefore, the buyer must be relatively confident of the increase in the level of sales when choosing a lower margin price. It is also important to remember that with this low-margin philosophy, expenses must not increase proportionally to an increase in sales.

Establishing Prices A variety of factors influence the actual price placed on merchandise. As discussed in Chapter 5, retail management sets a markup goal. To achieve this goal, an appropriate initial or primary markup percent is determined on the basis of past history and expected managerial and operational adjustments. The markup guides the pricing process. The buyer, however, must also consider the implications of the company’s objectives, image, policies, merchandise, strategies, and customer demand, as previously discussed in this chapter. Keeping all of these factors in mind, the buyer must determine an appropriate initial offering price for the goods. The buyer begins the pricing process by calculating a price, using the initial or primary markup equation. Reviewing past sales histories for similar merchandise, the buyer can determine whether the calculated price is high or low and adjust the price as necessary. The buyer must consider any pricing policies the retailer uses, such as odd or even pricing. For example, with an odd pricing policy, companies end all regular-priced merchandise with odd numbers, such as 99 cents. This policy may be extended by ending all discounted or sale merchandise prices with a slightly different number, such as 49 or 69 cents. In companies where pricing is less sensitive, retailers often use even pricing, or prices ending in 00 cents. To comply with the pricing policy, the buyer would again adjust the price of goods slightly higher or lower. After making all the necessary adjustments, the buyer establishes the initial price to be placed on the individual items. Prices are recorded in the company’s computer system or some other accounting system and are made available to customers through product marking and signage. The buyer takes numerous bits of information into account when deciding on prices for goods. Often, diverse information leads to conflicting results. In such cases, it takes the wisdom of a seasoned buyer to determine the appropriate pricing solution. Because of the complexity of pricing, many companies now rely on price optimization software that can more quickly and accurately process vast amounts of information and suggest initial prices, price changes, and other pricing solutions that should most effectively maximize profits. Price optimization software has become one of the most widely used strategic management tools.

PROCESSING PRICES Prices and price changes directly affect the dollar value of merchandise on hand. Care must be taken in processing prices and price adjustments to maintain accurate accounting records.

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Pricing and price change data are entered into the company’s computer system or other accounting system. In companies using point-of-sale (POS) systems, the computer records prices and price changes at the time customers purchase the goods. With today’s point-of-sales technologies, most retailers no longer have to mark each item of merchandise to indicate the price or price adjustment. Marking prices and price changes on merchandise has, in most cases, become a form of customer service. Customers depend on signage, printed or electronic, for an accurate representation of prices.

Price Changes Retailers would prefer to sell most goods at the original retail price. However, a decrease or an increase in price is sometimes necessary to achieve successful merchandising operations. Several major types of price changes are used by retailers: 1. Markdowns 2. Markdown Cancellations 3. Additional Markups 4. Markup Cancellations 5. Employee and Customer Discounts Every price change has an impact on markup and, therefore, on gross margin and net profit. Any change in retail prices, whether a decrease or an increase in the original retail price, is used in calculating the value of the inventory on hand. Price changes, including both increases and decreases in retail, are classified according to whether they affect the net markdown figure or the total value of the merchandise handled. (Price revisions that affect the total value of the merchandise handled are discussed in more detail at the end of the chapter.)

Sell-Through With today’s advanced technology, retailers are able to track sales and identify fast- and slow-selling merchandise. One way retailers identify the success of the selling of merchandise is by analyzing sell-through reports indicating how much, in units or percent, of a style or product, or collection of goods in inventory has been sold. Sell-through percent expresses the rate at which an item is sold over a specified period of time. Buyers typically evaluate the sell-through percent of each style or product in their department on a weekly, season-to-date, or life-to-date basis. Sell-through percent is expressed from an equation comparing units of merchandise in a given period of time. Use the following formula to find sell-through percent: Sell@Through % ⴝ

(Original on Hand ⴚ Current on Hand) Original on Hand

Sell@Through % ⴝ

OR

Number of Units Sold Number of Units Received

Example 6-2 A small boutique received 25 studded belts from a popular vendor for the spring season. At the end of the season she had 5 belts left on hand. What was the percent sell-through of the studded belts? Solution: Sell@Through % =

(25 - 5) 25

= 80%

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Merchandise that has a high sell-through percent indicates buying and selling success. Desirable merchandise was acquired, priced appropriately, and merchandised in an an appealling manner. However, merchandise that has a low sell-through percent is generally product that has low customer demand. The appeal of the merchandise may be limited, the pricing may be inappropriate, and the promotion and sales strategies may not be compelling to the customer. The inventory of product with slow sell-throughs usually are in excess of customer demand. To stimulate customer interest and quickly move product, a buyer may choose to initiate a markdown.

Markdowns Markdowns are the most common type of price change. Markdowns can be a highly effective tool for generating customer traffic, increasing sales, and acquiring money to purchase new merchandise. Failure to take markdowns when warranted results in money tied to inventory that does not sell and inability to buy current merchandise. Markdowns should be used as a merchandising tool. An analysis of markdowns enables buyers to locate trouble spots and adjust future assortments. For example, styles that require excessive markdowns indicate merchandise that failed to attract sufficient customers and that should probably be avoided in the future. A markdown is a reduction from the original or previous retail price.

PURPOSE OF MARKDOWNS Markdowns serve several purposes: 1. Stimulating sales of slow-moving or inactive stock. 2. Disposing of broken assortments, discontinued lines, and damaged or shopworn merchandise. 3. Providing funds for the purchase of new merchandise. 4. Meeting competitors’ prices for the same or similar merchandise. 5. Increasing customer traffic. Markdowns are used by retailers to move merchandise. These reductions in price will lower the amount of the final markup that will be obtained. Because maintained markup and gross margin represent the retailer’s final markup, it is important that they be planned in relation to the initial or original markup. As discussed in Chapter 5, the initial markup represents the first markup placed on an item to provide the original retail price that the retailer hopes to receive. However, the original retail price placed on merchandise will usually be reduced by markdowns, employee and customer discounts, stock shortages, and the like. The original retail price of an item must be large enough to cover the planned reductions and still provide the desired gross margin and maintained markup. Therefore, markdowns are important factors in determining gross margin and maintained markup. Markdowns reduce the retail price, causing a decrease in gross margin that is further reflected in a decrease or even elimination of profit. Retailers should carefully plan for and control markdowns because of their significant impact on achieving profits.

REASONS FOR MARKDOWNS Because markdowns are the most common type of price change, it is important to recognize the reasons for taking markdowns. Some markdowns are caused by errors in buying, pricing, and selling; other markdowns are taken to stimulate sales. Buying Errors. Buying errors, such as purchasing the wrong styles, colors, sizes, materials, or quantities, can result in having to take markdowns. Buying errors can be minimized by careful planning of sales and purchases. When possible, pretesting merchandise by buying in small quantities before ordering Retail Pricing for Profit

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in large amounts may help to eliminate excessive markdowns. The frequency of changes in the fashion industry may not permit testing of fashion merchandise and may increase the difficulty of predicting customer demand. Another buying error may relate to late delivery of merchandise. Goods that are received after the peak of customer demand may require excessive markdowns. Pricing Errors.

Errors in pricing are another reason for markdowns. The initial retail price may be set

too high or too low. When merchandise is priced too high, the customer may turn to a lower priced competitor leaving the retailer with excess inventory requiring markdowns to sell. When merchandise is priced too low, a retailer may be losing revenues that customers would willingly provide and that another retailer is earning. Selling Errors. In selling merchandise, a major error that leads to markdowns is the failure to properly display and show merchandise. Goods may be slow sellers simply because they are in the wrong location or are not displayed in an appealing manner. Careless selling or high-pressure selling may lead to customer returns, causing markdowns. Returned goods may be past the peak of customer acceptance. A large proportion of returned merchandise ends up having to be reduced. Markdowns may also result from careless handling of merchandise in the department. Uninformed or inattentive salespersons and poor stock keeping contribute to shopworn and damaged merchandise that will have to be reduced in price. Special Sales.

Regular stock may be marked down for special sale, or the retailer may buy special-

purchase goods to sell at promotional prices. For example, retailers may regularly repeat certain events, such as a holiday or store anniversary sale, for which promotional merchandise will be advertised. For these events, markdowns are generally temporary, lasting for the duration of the event. Special purchases include merchandise that is offered to retailers by vendors at lower-than-regular prices. Such merchandise is often of lower-than-usual quality and may include broken sizes or end-of-season goods. Special-purchase merchandise is sometimes marked at higher prices when it is first placed on the sales floor and is then marked down for a sales event. Retailers frequently find that even higher markdowns must be taken on special-purchase goods following a sale in order to move the unsold merchandise. Broken Assortments and Out-of-Season Goods.

Markdowns must also be taken to weed out

merchandise that is no longer salable because of broken assortments or to clear goods to provide more space for new merchandise. In some departments, such as fabrics and floor coverings, remnants are reduced to encourage sales. Amount and Timing of Markdowns.

Markdowns are a necessary part of retailing. The timing and

amount of markdowns are important factors in achieving profit. The timing of markdowns relates to the amount of the markdowns needed in order to sell merchandise and to protect the gross margin or profit potential. The size of the markdown relates to the timing of the markdown. Appropriate timing of markdowns can have a positive impact on turnover in that markdowns decrease the value of the inventory and increase sales. Depending on the type of retailer, the policies governing the timing and amount of markdowns will vary. With many retailers, the amount and timing of markdowns are related. The markdown timing sequence varies with different retailers and with the type of merchandise. For instance, fashion goods, because of their inherent trend toward obsolescence, typically require higher, more frequent markdowns than staple goods, which may stay in stock with little or no price reduction. Seasonal goods require considerably higher markdowns after the season than during the season. Markdowns also vary according to the product category. For example, markdowns in cosmetics are virtually nonexistent, whereas markdowns in juniors’ or misses’ apparel are relatively frequent and deep. Traditionally, retailers postponed their markdowns until the end of the season. Storewide markdowns were usually taken twice a year, in January and July (after the peak selling seasons of Christmas and the Fourth of July). Today, many retailers believe that a small markdown taken early in the season is more likely to move merchandise 150

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than a drastic reduction in prices late in the season. The first markdown should be sufficient to move the majority of goods because the goal of the retailer is to sell the majority of merchandise at the first markdown. Late-in-theseason markdown policies are still commonly used by upscale department stores and specialty stores. In addition, specific departments, such as furniture, often use late-season markdowns. Many successful merchants believe that merchandise should be marked down as soon as the rate of sales slows down as noted by careful observation of sell-through percent. These markdowns are usually small, since the merchandise is still in demand at that time. A small markdown taken soon in the season not only will help sell slow-moving goods, but also will provide more open-to-buy for newer merchandise. In addition, bringing in new styles during the middle of the season tends to increase customer traffic. Some retailers use regular monthly or weekly sales to encourage customers to purchase slow-moving goods. Many department, discount, and chain stores organize sales or move goods to clearance areas at regular intervals to encourage the sale of slow-moving and inactive stock and to pull customer traffic into the store. Some retailers maintain an automatic markdown policy that involves reducing the price of merchandise according to a predetermined schedule. The policy establishes the amount and timing of markdowns based on the rate of sales and length of time the merchandise has been in stock. For example, a buying office may submit markdowns at the beginning of the month based on a top (high) and bottom (low) selling report. Corporate then sends those markdowns to the stores on a schedule based by division so that the stores are not overwhelmed with marking all goods at the same time. For instance, they may markdown women’s apparel the first week, men’s apparel the second week, footwear the third week, and accessories/handbags the fourth week. To differentiate between full-price and sale merchandise, retailers often mark goods with prices that identify sale goods like ending the price in $0.88. Permanent Markdowns typically follow a markdown cadence. Each retailer and division or department may have a different cadence. A typical cadence would be first markdowns going to 25% off for a month, then second markdown to 35% off for a month, and then to a third markdown at 50% off. In addition, a specific price ending may be placed on the product to correspond with the timing of the markdown. For example, the price of the first markdown may end in $0.98, the second in $0.97, and the third in $0.96. Promotional Markdowns are used by many retailers today for marketing purposes. In particular, retailers that have adopted a high/low pricing strategy regularly take markdowns on popular products to generate customer traffic and the sale of additional merchandise. Advertisements prominently feature goods that are marked down for a specified period. Markdowns are usually temporary and recorded at the point-of-sales, allowing prices to efficiently revert to a higher amount following the promotion. Most markdowns are corporate driven. The centralized buying office usually sets prices, monitors sales patterns, and makes price adjustments as needed. Also, centralized buyers respond to promotional needs by acquiring appropriate merchandise and setting promotional prices. In some retail organizations, store managers are given the authority to be responsive to their local market by taking limited markdowns on select items. An example would be a company that runs a hot deal advertisement, marks several items down temporarily, and then remarks the products back to the full price after the promotion ends. At the same time in the same company, the store managers may also offer a “manager’s special” on a few select items within the store.

Markdowns and Vendor Negotiations Vendors play a strong role in the amount and timing of markdowns. In agreements at the time of purchase, some vendors regulate the amount and timing of markdowns in order to control the price and protect the image of their goods. For example, some vendors establish prices for their products and require retailers to charge their customers those prices. Many of these same vendors periodically authorize specified sales and markdowns. Any deviation from the pricing policy will jeopardize the future of the retailer–vendor relationship. Retail Pricing for Profit

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Retailers often request markdown money from vendors to cover lost gross margin dollars that result from markdowns. In this type of agreement, the vendor shares the loss from markdowns, enabling the retailer to achieve a specific maintained markup percent. According to the Robinson–Patman Act, markdown money should be provided to all retailers on a proportionally equal basis, usually a percentage of purchases. With markdown agreements, the retailer marks down and sells the merchandise according to the terms of the contract. The retailer later returns or disposes of unsold merchandise as agreed upon and submits an appropriate chargeback to the vendor. Chargebacks are charges to the vendor for portions of the money the retailer has already paid for the goods. Markdown money allows retailers the opportunity to try risky merchandise, knowing that a portion of markdown dollars can be recouped and their gross margin will be maintained. When brand merchandise doesn’t sell, retailer buyers may work with the vendor to negotiate a return to vendor (RTV). In this case, the vendor agrees to take the slow moving merchandise back from the retailer. Often the merchandise is physically sent back to the vendor at the vendor’s expense. However, in some instances RTVs are merely a reimbursement of the cost of merchandise which is then disposed of in the manner instructed by the vendor because the cost of returning the merchandise outweighs the current value of the product. In cases where markdown money or RTVs are not available, retailers may opt to sell leftover merchandise to a jobber. After merchandise has been marked down a certain percent and been available for customers for a specified period, retailers may want to remove the merchandise from their offerings. Such merchandise may be sold to jobbers—third parties that purchase unsold merchandise in bulk, consolidate goods, and resell them to other off-price merchants. Retailers work with jobbers to retain control over their maintained markup, as well as to remove stale merchandise from their assortment, preserving their image and reputation.

CALCULATING MARKDOWN PERCENT For planning and control purposes, markdowns are expressed as a percent of net sales. Because markdowns are based on net sales, markdown percents cannot be calculated until the merchandise is sold. Although this workbook contains some problems requiring calculation of the markdown percent on one style or group of merchandise, markdown percents are usually calculated for a certain length of time, rather than on individual items, and are based on sales for that length of time. To calculate markdown percent, first find the dollar markdown and then divide the net sales into the dollar markdown. $ Markdown ⴝ Previous Price ⴚ New, Reduced Price Markdown % ⴝ $ Markdowns ⴜ $ Net Sales

Example 6-3 The designer department received 4 dresses in style 1436 that retailed for $400. All 4 dresses were reduced to $280 before they were sold. What was the markdown percent on this style? Solution: Markdown $ = Previous price - New, reduced price = 4 * ($400 - $280) = 4 * $120 = $480 Sales from this style = 4 * $280 = $1,120 Markdown % = $ Markdown , $ Net Sales = $480 , $1120 = 42.86%

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Example 6-4 The net sales for a department during the month of June were $28,000. If markdowns for June totaled $7,280, what was the markdown percent? Solution: Markdown % = $ Markdowns Taken in June , $ Net Sales for June = $7,280 , $28,000 = 26%

At times, it may be necessary to determine net sales from the dollar markdowns and the markdown percent. The solution to this type of problem (finding the base) was covered in Chapter 2. The percentage amount ($5,400) is divided by the percent (30%). The next example shows how to determine net sales, given the markdown dollar amount and markdown percent.

Example 6-5 Determine the net sales if markdowns for May were 30% of net sales and the markdown dollar amount was $5,400. Solution: $ Net Sales = $ Markdown , Markdown % = $5,400 , 30 % = $18,000

MARKDOWNS USED IN ADVERTISING When merchandise is advertised to the public, markdowns are expressed as a markdown dollar amount or as a percent of the original retail. This practice has been adopted because it is how consumers perceive markdowns. Advertised Reduction Original retail

$200.00

Internal Records $200.00

Reduction

- 40.00

- 40.00

Sale price

$160.00

$160.00

Markdown %

$40 , $200 = 20%

$40 , $160 = 25%

All problems in this workbook requiring calculations of markdown percents are to be calculated with net sales as the base (net sales = gross sales or, as in the previous example, net sales = original retail minus markdowns).

Practice Problems • Exercise 6.1 1. The contemporary department received 120 fashion T-shirts for the spring season. At the end of the month 35 T-shirts were on hand. What is the percent sell-through of the T-shirts?

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2. The store received 1,015 blouses that retail for $85 each on the first of the month. During the first week, 55 blouses sold. What was the sell-through for week one?

3. The accessories department received 500 designer sunglasses that retailed for $285. The department sold 100 the first week, 35 the second week, 60 the third week, and 20 the fourth week. Calculate the sell-through percent for the month.

4. A buyer has 350 sandals on hand at the beginning of the month and first week has a 20% sell-through. How many units were sold during week one?

5. Using the information below calculate the sell-through for (a) cashmere crews, (b) cashmere-blend cardigans, and (c) the total for the department. Total Received

Units Sold

Sell-Through %

Cashmere Crew

1,200

400

(a)

Cashmere-Blend Cardigan

1,200

485

(b)

Total Department

2,400

(c)

6. During January, the markdowns for rugs at Jossett’s Designs totaled $15,200. Rug sales during the month were $95,000. What was the markdown percent for January?

7. For a three-month period, the Bath Shop had net sales of $110,000. If the markdowns for this period totaled $16,775, determine the markdown percent.

8. The merchandise plan for the children’s department indicated planned sales of $850,000 and planned markdowns of 30.2%. Find the planned dollar markdowns.

9. Last year, markdowns for case goods in a design shop were 15.5%. If markdowns totaled $84,475, determine the net sales for the year.

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10. During June, the shoe department in a sporting-goods store marked 200 pairs of $78 athletic shoes down to $59. The June promotion was a huge success, and all of the shoes sold at $59. What was the markdown percent on these athletic shoes for June?

Markdown Cancellation and Net Markdowns Many markdowns are taken to rid the retailer of certain merchandise. In such cases, the merchandise is permanently marked down. These types of markdowns are known as permanent markdowns and permanently change the value of the inventory. They are recorded and accounted for before any sales take place. Permanent markdowns typically occur in a cycle as previously noted. In other cases, merchandise is temporarily reduced for a special sale, and after the sale is over, the remaining goods are returned to or toward their original price. These types of markdowns are known as temporary or promotional markdowns. An example of a temporary markdown is a POS markdown, which is usually communicated by a percentage and has a limited time offer. Temporary markdowns are recorded at the time of sale. The value of the inventory stays at the current level. Accounting records often separate sales with permanent and temporary prices changes. Separate records enable the retailer to determine the effectiveness of promotions and sales events, as well as to evaluate the success of clearance efforts. An upward price change on merchandise previously marked down is a cancellation of a markdown. Markdown cancellation is the upward price adjustment that offsets a former markdown. Cancellations usually occur after a special sale if the remaining merchandise is repriced upward. The remaining merchandise may be repriced to its original price or repriced to a different price. However, the new price should not exceed the original retail price. Today, markdown cancellations are in the store’s computer system, thus eliminating the need to re-mark merchandise and record the cancellations manually. However, the student should understand how markdown cancellations are calculated. Net markdown is the difference between the total markdown and the markdown cancellation. Net Markdown ⴝ Total Markdown ⴚ Markdown Cancellation

Example 6-6 For a midnight sale, prices of 24 jackets were reduced from $80 to $60. During the sale, 14 jackets were sold. After the sale, the remaining 10 jackets were re-marked to the original $80 price. Determine the total markdown, markdown cancellation, and net markdown. Solution: Total markdown - Markdown cancellation Net markdown

24 jackets * ($80 - $60) = $480 10 jackets * ($80 - $60) = - 200 $280

Net markdown percent is the net markdown divided by the sales actually obtained. Net Markdown % ⴝ $ Net Markdown ⴜ $ Actual Sales In order to calculate the net markdown percent, it is necessary to determine the sales actually obtained on the merchandise sold. The net markdown divided by the total sales gives the net markdown percent. Retail Pricing for Profit

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Example 6-7 Using the same information from Example 6-6, assume that 36 jackets were received and 12 jackets were sold prior to the midnight sale. As stated in Example 6-6, 14 jackets were sold during the sale. The remaining 10 jackets were eventually sold at the full $80 price. Determine the net markdown percent. Solution: First determine the actual sales: Sales prior to the sale

12 jackets * $80 = $960

Sales during the sale

14 jackets * $60 = $840

Sales after the sale

10 jackets * $80 = $800

Total sales obtained

 36         = $2,600

Net Markdown % = $ Net Markdown , $ Actual Sales = $280 , $2,600 = 10.77%

The merchandise in Example 6-7 was re-marked to its original price. After a sale, the remaining goods may be priced toward the original price, instead of being priced at the exact original price. Example 6-8 shows how this is done.

Example 6-8 The buyer for the Book Shop received 200 books priced at $15.95 each. Fifty books sold at this price. The remaining books were marked down to $11.95 for a special sales promotion. During the promotion, 85 books were sold. After the promotion, the buyer repriced the remaining books to $14.95 and sold all of them. Determine a. Total markdown b. Markdown cancellation c. $ Net markdown d. Net markdown percent Solution: a. Total markdown (prior to the sale): 150 books reduced from $15.95 to $11.95 Total markdown = 150 * ($15.95 - $11.95) = 150 * $4.00 = $600 b. Markdown cancellation (after the sale): 65 books were repriced to $14.95. Markdown cancellation = 65 * ($11.95 - $14.95) = 65 * $3.00 = $195 c. $ Net Markdown = Total Markdown - Markdown Cancellation = $600 - $195 = $405 156

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d. To find the net markdown %, first determine total sales: = 50 books * $15.95 each = $ 797.50

Sales prior to sale

Sales during the sale = 85 books * $11.95 each = $1,015.75 Sales after the sale

= 65 books * $14.95 each = $ 971.75 = $2,785.00

Total sales Net Markdown % = $ Net Markdown , Total Sales = $405 , $2,785 = 14.54%

Practice Problems • Exercise 6.2 1. For a special two-day sale, a sportswear buyer reduced the price of 30 blouses from $40 to $32 each. Twenty-one of the blouses were sold during the sale. After the sale was over, the remaining 9 blouses were returned to their original retail price. Determine (a) the markdown cancellation and (b) the $ net markdown.

2. A buyer reduced the price of 62 shirts from $28 to $20 each for a special three-day sale. During the sale, 44 shirts were sold. After the sale, the remaining shirts were priced at $25 each. Determine the markdown cancellation.

3. A buyer reduced the price of 42 jackets from $85 to $60 each for a one-day sale. Forty jackets were sold during the event. After the sale, the remaining jackets were marked up to $75. All of the jackets were sold at that price. Determine (a) the markdown cancellation and (b) the $ net markdown.

4. During March, the Camera Shop had a net markdown of $529. If the total markdowns amounted to $830, determine the markdown cancellation.

5. The buyer for the boys’ department had received 4 dozen all-weather jackets that retailed for $68 each. After several weeks, 8 of the jackets were sold and the remaining 40 jackets were marked down to $50 for a one-day sale. Twelve jackets were sold during the one-day sale. All remaining jackets were re-marked to $61 and eventually sold at that price. Determine the net markdown percent.

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6. A buyer reduced the price on 135 blouses from $49.99 to $39.99 for an anniversary sale. After the sale, the remaining 54 blouses were returned to the presale price. Determine (a) the markdown cancellation and the (b) $ net markdown.

7. Six hundred shirts were purchased at a cost of $15.75 each. The buyer decided to retail the shirts for $34.99 each. After a month, 123 shirts were sold at $34.99. The remaining shirts were marked to $24.99 for a storewide sale. Following the sale, 192 shirts were left and were repriced to $29.99. Determine the markdown cancellation.

8. A buyer received 5 dozen jackets retailing for $150 each. After several weeks, only 8 of the jackets had been sold. The prices of the remaining 52 jackets were reduced to $110 each for a promotion. During the promotion, 10 of the jackets sold at the reduced price. After the promotion, the remaining 42 jackets were repriced to $140 and sold. Determine the net markdown percent.

9. A buyer had 68 coats in stock at a retail price of $485 each. The coats were marked down to $399 for a special sale. When the special sale ended, the buyer marked the 39 remaining coats back to their original price. Determine the markdown cancellation.

10. For a Veterans Day sale, a buyer reduced the prices of 72 shirts from $49 each to $35 each. The next day, the 48 shirts that remained were repriced to $45. What was the amount of the markdown cancellation?

Additional Markup and Markup Cancellations In addition to markdowns and markdown cancellations, there are two other types of price changes used by many stores: additional markups and markup cancellations. Additional markup is a price revision that increases the selling price above the initial retail price. An additional markup is used to correct a pricing error made by the buyer, by data entry staff, or by markingroom personnel that resulted in the initial price being marked too low. Another reason for an additional markup is to increase retail to coincide with an increase in cost. If goods cost more when reordered, they must be priced higher to capture a comparable markup percent, gross margin, and, ultimately, profit margin. An additional markup might be taken on merchandise already in stock when reordered merchandise is retailed at a higher price. Most department and specialty stores want to avoid the confusion that occurs when the same style is marked at different retail prices. Computerized accounting of price changes simplifies the application of additional markup. 158

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$ Additional Markup  New, Increased Price  Previous Price Additional Markup %  $ Additional Markup  $ Net Sales

Example 6-9 The sunglass department received 20 sunglasses in style ch42 that retail for $200. Currently there are 15 of the same style of the sunglasses on the floor with a retail price of $180. The buyer has initiated an additional markup dollar on the 15 older sunglasses to avoid any confusion for customers. Calculate the additional markup % on the older sunglasses. (All 15 sunglasses were sold at the new $200 price point.) Solution: $ Additional Markup = New, Increased Price - Previous Price = 15 * ($200 - $180) = 15 * $20 = $300 $ Net Sales from this style = 15 * $200 = $3,000 Additional Markup % = $ Additional Markup , $ Net Sale = $300 , $3,000 = 10%

Markup cancellation is a reduction in the price of an item that previously had an additional markup. A markup cancellation is a downward price adjustment that offsets an additional markup. It is used to adjust the markup on the purchase in accordance with the original intent and is not to be used to manipulate stock ­values. By definition, a markup cancellation never exceeds the amount of additional markup applied to an item. The cancellation of additional markup should never reduce the retail price lower than the original retail price. Most stores do not recognize markup cancellations and classify all downward price changes as markdowns. Markup cancellations are infrequent, except in highly promotional departments or stores. Stores that do allow markup cancellations must be very careful in determining which downward revisions are markup cancellations, because markup cancellations and markdowns affect the valuation of merchandise differently. Markup cancellations should be limited to corrections of errors and cancellations of an additional markup.

Discounts As illustrated in Chapter 5, retail reductions influence the initial markup needed. Retail reductions include discounts as well as markdowns and shortages. Retailers offer discounts for special purposes and to particular sectors. Discounts are a reduction in the price of merchandise or services for customers based on their ability to meet certain criteria. Most companies give employees a discount that is usually stated as a percent off the retail price. Discounts are an important fringe benefit for employees, as well as a means of encouraging employees to use the company’s goods. Many retailers allow larger discounts for executives. For instance, a manager or buyer may receive a 30% discount, whereas a salesperson in the same store may receive a 20% discount. The percentage of the discount may also vary with the type of merchandise. A retailer may allow a higher discount on appropriate clothing to wear to work. As a special incentive, employees may be granted an additional discount or a larger discount for a limited period. Retailers may also extend employee discounts to the employees’ immediate family.

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Example 6-10 An employee purchases a lamp that retails for $439. The employee discount is 15%. How much should the employee pay for the lamp before sales tax? Solution: Employee discount = $439 * 15% = $65.85 Employee purchase price = $439 - $65.85 = $373.15 Alternative Solution: Employee discount complement = 100% - 15% = 85% Employee Price = Retail Price * Discount Complement $373.15 = $439 * 85%

Many retailers provide discounts to special customers who meet certain designated criteria. Promotional discounts may be offered to select groups such as senior citizens, persons with disabilities, or students. Special discounts may be offered to customers continuously or during specified times. For example, a retailer may offer a 10% discount to senior citizens on Tuesdays. Discounts may also be offered to special customers, based on the performance of a particular role. Some retailers in the home-furnishings field offer independent interior designers discounts on purchases such as fabric, accessories, case goods, and other home-furnishings products. In rare instances, educational institutions and charitable organizations may be given a discount. Retailers widely use customer loyalty programs, which typically include some form of special customer discount. Customer loyalty programs are a type of promotion that encourages repeat business. In most customer loyalty programs, special customers are granted membership, which entitles them to attend special functions, receive particular customer services, and earn discounts or rebates. Discounts in customer loyalty programs may be offered through coupons or cards entitling members to special discounts. Rewards of the program are usually based on loyalty or customer sales. The more a customer purchases, the greater are the rewards. Although these discounts are a reduction, the increase in sales more than offsets the loss in reductions. Retailers use a variety of other forms of discounts to attract and satisfy customers. Stores issue discount coupons in conjunction with advertisements or promotions. Coupons entitle the customer to a percent or dollar amount off a purchase of a particular item or a group of items. Online retailers give promotion codes that provide customers a discount. In some cases, company employees are authorized to offer discounts for slightly damaged merchandise or to match prices offered by other retailers. Retailers or manufacturers may also offer customers rebates on purchased items or cash-value rewards to be used on future purchases. On a profit-and-loss statement, discounts are usually combined with markdowns and shortages to show total retail reductions. As seen in Chapter 5, retail reductions, including employee and special-customer discounts, are important factors in determining initial markup needed.

Practice Problems • Exercise 6.3 1. Currently, a retailer has 20 men’s casual slacks on the floor priced at $35.00. A new shipment of the same slacks is arriving but the buyer will need to charge $40.00 to maintain his gross margin. To avoid confusion

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on the sales floor, the buyer reprices the existing slacks to $40.00 and all sell by the end of the month at this new price. Calculate the additional markup percent on the slacks.

2. The housewares department consistently carried coffeemakers. A shipment of 24 new coffeemakers just arrived adding to the 12 that were already in inventory. Previously, they were priced at $49 but with the new shipment all would be priced at $59. All coffeemakers sold at the $59 price point. What was the additional markup percent gained on the coffeemakers already in inventory?

3. A store gives its employees a 25% discount on all purchases. If a salesperson buys a coat that retails for $249, (a) what is the dollar amount of the employee discount? (b) If sales tax is 8%, what will the employee pay for the coat?

4. The lawyers for a store receive a 10.5% discount on all merchandise purchased. The tax on all purchases is 7%. If a store’s lawyer bought a suit that retails for $500 and a shirt that retails for $50, determine the total amount of the purchase, including tax.

5. As manager of a store, Mr. Thomas receives a 30% discount on clothing and a 20% discount on furniture. He purchases two suits retailing for $350 and $285 and a set of lawn furniture priced at $549. What is his total bill, including a 6.5% tax on all items?

6. Jane receives a 15% employee discount on all merchandise. Determine her total payment for a group of items retailing for $25.00, $19.00, $49.99, $15.99, and $11 (include 7% tax).

7. As a frequent customer at a small decorative-fabric store, a local interior designer receives a 20% discount on all purchases. She bought 12 finials at $32 each, 6 fluted drapery rods at $42 each, and 12 metallic tassels at $48 each. Include a 9% tax on the purchase and calculate her total payment.

8. Travis found a coupon that offers a 20% discount on all purchases made from a local sporting-goods store on Wednesdays. While shopping at this store one Wednesday, Travis opted to buy a life jacket priced at $79, two paddles priced at $38.00 each, and a water bottle priced at $12. If the sales tax is 7.25%, what is Travis’s bill, after his use of the store coupon?

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9. Juan received an e-mail with a promotional discount offering a 10% discount on all purchases from a certain company’s Web site. He selects a book for $40 that is currently offered with a 15% discount. He also selects a CD for $15. Shipping is free and no tax is charged. How much is Juan’s bill?

10. As a member of Pets Customer Loyalty Program, Marjorie is entitled to a 15% discount on all her purchases at the store. Marjorie purchases food and treats for her cat priced at $6.75, $11.50, $3.25, $5.50, and $23.00. (a) How much is Marjorie’s bill? (b) How much money did Marjorie save by being a member of the Customer Loyalty Program?

11. University students receive a 10% discount on all supplies and a 15% discount on all apparel at the Varsity Shop. Reggie purchases a lab notebook for $4.50, a portfolio for $13.50, and a sweatshirt for $20.00. Sales tax is 6.5%. Determine the total amount for Reggie’s purchases.

12. As an employee of the Cool Kids Store, Winston, as well as his wife, Karol, receives a 20% employee discount. Karol selects jackets marked at $36.88 and $41.88 for their two children. With the employee discount and a 5% sales tax, how much is Karol’s bill?

Definitions Definitions

Additional Markup – Price revision that increases the selling price above the original retail price.

Jobbers – Third parties that purchase unsold merchandise in bulk, consolidate goods, and resell them to other off-price merchants.

At-the-Market Pricing – A pricing policy retailers use that sets prices exactly at or near the same price as competitors’ prices. Also called competitive pricing.

Leader Pricing – A pricing policy whereby a retailer offers brand-name merchandise at special, reduced prices to attract consumers with the hope that they will purchase other, regularly priced items.

Automatic Markdown Policy – A pricing policy retailers use that reduces prices on a regular schedule based on product movement. Chargebacks – Charges to the vendor for portions of the money the retailer has already paid for the goods. Discount – A reduction in the price of merchandise or services for customers based on their ability to meet particular criteria. Discounts are used as an incentive encouraging customers to purchase goods or services. Everyday Low Pricing (EDLP) – A pricing policy that sets prices somewhere between the lowest discounted sale price and the regular, nonsale price of competitors. High/Low Pricing – A pricing policy that sets prices above the EDLP of competitors and uses frequent special sales for short periods to increase consumer interest. 162

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Loss Leaders – Well-known brand-name products priced below cost and used in leader pricing. Markdown – A reduction from the original or previous retail price of merchandise. Markdown Cancellation – An upward price adjustment that is offset against former markdowns. Markdown Money – Money obtained from manufacturers to cover lost gross margin dollars, which result from markdowns that occur late in the season. Markup Cancellation – A reduction in the price of an item after it has been subject to additional markup. Net Markdown – The difference between the total markdown and the markdown cancellation.

Permanent Markdown – A reduction in the retail price of merchandise to clear the merchandise from inventory.

Price Zone – A series of price lines that are relatively close together and tend to appeal to a certain segment of customers.

Prestige Pricing – A pricing policy used in retail stores that wish to project a prestigious image. Prices are set higher than those of competitors to reflect exclusivity, personal service, and high-quality merchandise. Also called above-the-market pricing.

Return to Vendor (RTV) – An agreement whereby the vendor takes back unsold merchandise at little or no cost to the retailer.

Price Line – A specific price at which merchandise is offered to the customer. Also called price point. Price Lining – The practice of predetermining the retail points at which an assortment of merchandise will be offered for sale. Price Range – The spread between the highest and lowest price line offered for sale.

Sell-Through – A measure indicating how much, in units or percent, of a style or product in inventory has been sold. Special Purchase – Merchandise purchased by the retailer at a lower-than-regular price. Temporary (Promotional) Markdown – A reduction in retail price for a specified period, usually short term, with the intent that the merchandise will ultimately be repriced.

Summary Problems Chapter 6 • Summary Problems

1. The designer suit department received 220 suits for the fall season. At the end of the month 150 suits were on hand. What was the sell-through percent of the suits?

2. A buyer for a large department store has 999 skirts on hand at the beginning of the month. On Monday she reviews her sell-through report on skirts and sees a 20.02% sell-through. How many units were sold?

3. Using the information below calculate the sell-through percent for each item and the total for the department. Total Received

Units Sold

Style: 5467

750

455

Style: 5470

750

329

Sell-through %

Total Department

4. During July, sales for the junior sportswear department were $625,000 and markdowns totaled $168,750. What was the markdown percent for July?

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5. The men’s department had sales of $60,000 for December. During the month, the buyer reduced prices of 38 suits from $695 to $445 and that of 20 suits from $550 to $287. What was the markdown percent for the month?

6. The shoe department had gross sales of $325,000 and customer returns of $24,000. Determine the markdown percent if the dollar markdowns totaled $57,190.

7. Determine the markdown percent for July if sales were $32,000 and the buyer for home furnishings took the following markdowns: Quantity

Original Retail ($)

Markdown Price ($)

12 table lamps

235

149

85

59

18 silk plants 15 clocks

145

79

22 pictures

300

229

4 tables

945

598

8. During October, the markdowns for a department were $13,650, or 32% for the month. Determine the net sales during the month.

9. The juniors’ department had net sales of $580,000 for October. If markdowns were 39.5%, determine the dollar amount of the markdowns.

10. A sportswear buyer reduced prices of 25 belts from $24 to $18 for a four-day sale. Ten of the belts were sold. After the sale, the remaining belts were priced at $22 each. Calculate the markdown cancellation.

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11. During May, a shop had a net markdown of $940. If total markdowns were $1,890, determine the markdown cancellation.

12. A buyer received 48 skirts retailing for $55 each. For a moonlight madness sale, the price of these skirts was reduced to $40. During the sale, 28 skirts were sold. After the sale was over, the remaining 20 skirts were returned to their original price. All of these skirts were sold for $55. Find the markdown cancellation, net markdown, and net markdown percent.

13. A buyer for accessories received 144 silk scarves priced at $38 each. For a two-day sale, the prices for the remaining 120 scarves were reduced to $25. Of this group, 55 scarves were sold. After the sale, the buyer marked the remaining scarves back up to $30, and all of these scarves were sold for $30 each. Calculate the net markdown percent.

14. A buyer had 64 sweatshirts in stock at a retail price of $36 each. He marked them down to $29 for a five-day sale. After the sale, 38 sweatshirts remained. The buyer marked the remaining sweatshirts to $32. The remainder of sweatshirts sold at this price. Determine the markdown cancellation, net markdown, and net markdown percent.

15. A giftware buyer received 36 crystal clocks that retailed for $79 each. Five clocks sold at that price before a special sales event. The remaining 31 clocks were marked down to $58. Nineteen of the clocks were sold during the sale, and the remaining clocks were marked to the original $79 price. The remaining clocks were eventually sold at full price. Calculate the net markdown ­percent.

16. Margo was delighted at the sales of the line of dresses she recently purchased. Because the merchandise was selling so fast, she quickly arranged to receive a second shipment of 720 dresses from the same vendor. When the merchandise arrived, the existing dress inventory at all of her stores was down to only 120 units priced at $40.00. Because Margo’s cost on the second shipment was slightly higher, she had to price the new arrivals at $44 and decided it would be best to reprice the already existing dresses to the same $44 price point. Customers continued to like the style of dresses so much that all of the units sold at full price. Calculate the additional markup percent on the remainder of the first shipment.



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17. Golfer’s Delight was to hold a summer spectacular event during which a celebrity golfer would be autographing golf bags for anyone purchasing the Pro Spirit line of clubs. To prepare for the event, the buyer purchased 15 additional sets of clubs to be priced at $400. There were already 10 sets of the clubs in stock but they were repriced from $350 to $400 for consistency. The event was very successful and all of the clubs sold. What was the additional markup percent earned on the clubs already in inventory? What was the total net sales on all clubs during the event?

18. As a member of the Customer Loyalty Club, Rudi received a series of discounts. If his purchases total $100 or more, his discount is 10%; if they total $200 or more, his discount is 20%; and if they total $300 or more, his discount is 30%. Rudi buys a pair of slacks at $69.00, two shirts at $34.00 each, a jacket for $47.00, and a belt for $28. Tax must be applied and is 8.5%. How much will Rudi pay for his purchases?

19. Alma, a sales associate, receives a 20% employee discount. Because she was the top sales associate of the month, Alma was given an additional 10% discount for the month of March. During March, Alma purchased a pair of running shoes for $89.50, a running suit for $129.99, two pairs of socks at $4.00 each, and a T-shirt for $21.50. What was the dollar amount of Alma’s purchases, including a 7.5% sales tax?

20. In a certain store, on Tuesdays customers over 55 years of age receive a 20% discount on all apparel and a 15% discount on all housewares and home accessories. Tina purchases six place mats at $6.50 each, six napkins at $4.00 each, a skirt for $42.00, and a knit top for $31.00. A sales tax of 6.5% is charged on all nonapparel items. Apparel items individually priced under $500 are tax exempt. How much is Tina’s total bill? (Tina is 60 years old.)

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Case Study 1 Permanent vs. Point-of-Sale Markdowns Judi Toerge, MFA. Academy of Art University Mercedes is the buyer for sweaters for a five-store specialty retailer in the southern United States. The store traditionally holds two sales per year, one in fall and one in spring, during which merchandise is promotionally priced for two weeks, either as a permanent markdown or as a POS markdown. While Mercedes does not buy into her markdowns (i.e., buy merchandise that she anticipates will be marked down), the store does encourage each department to have a strong representation of markdowns on the floor during the first week of the sale. This is the vehicle by which each department remains clean and current. Mercedes’s assortment, unlike that of her contemporary buyers in Collections, is item driven, so her range of styles is fewer, with more units being purchased to allow her to obtain a better gross margin because of lower costs. This year, she has a total of six SKUs that will be involved in the fall semiannual sale. Mercedes’s new merchandise manager is encouraging buyers to use a different approach in regard to the pricing strategy. Whereas in previous sales markdowns were taken permanently, Mercedes’s merchandise manager is suggesting the strategy should become more aggressive with

markdowns taken at the register or POS. Mercedes’s goal is to minimize her markdowns, maximize her sales, attain a 100% sell-through, and achieve a 60% maintained markup. She is not convinced that her sell-throughs will be sufficient if she takes the markdowns at the POS level, as her customer is considered to be value/quality driven with a high degree of loyalty to the store. Therefore, Mercedes decides to continue using permanent markdowns by marking the merchandise to 30% off, and subsequently to 50%, and then 70% off for the last three days. Her assumption is that at the end of the sale all units will be purchased. The following spreadsheet shows sales at full price and anticipated sales, using the 30%, 50%, and 70% markdown strategy. Discussion Questions for Case Study 1

1. Calculate total sales with this strategy. 2. Calculate total markdown dollars with this strategy. 3. Calculate markdown % and maintained markup %. 4. What other strategies could Mercedes have considered that would appeal to her core customer?

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168

40% Sell-through at 30% off Initial Buy at Cost ($)

Initial Buy at Retail ($)

160,250

39,000

Units Sales at Full Price

Dollar Sales at Full Price ($)

Sellthrough %

745

29,055

74.5

255

Units to be Marked Down

Unit Sales at 30% off

Dollar Sales at 30% off ($)

Markdown Dollars ($)

102

2,785

1,193

45% Sell-through at 50% off Balance Sells at 70% off Dollar Sales at 50% off ($)

Markdown Dollars ($)

153

1,343

1,343

84

983

2,293

Dollar Sales at 70% off ($)

Markdown Dollars ($)

Cost ($)

Retail ($)

IMU (%)

Initial Unit Buy

Shaker knit pullover

16.25

39.00

58.3

1,000

Cashmere crew

28.73

89.00

67.7

1,200

34,476 106,800

356

31,684

29.7

844

338

21,032

9,014

506

10,141

10,141

278

7,423

17,319

Cashmere v-neck

24.53

89.00

72.4

1,200

29,436 106,800

467

41,563

38.9

733

293

18,266

7,828

440

8,807

8,807

242

6,461

15,077

Merino cardigan

25.35

69.00

63.3

500

12,675

34,500

355

24,495

71.0

145

58

2,801

1,201

87

1,351

1,351

48

994

2,318

Silk/cotton twin set: cardigan

17.40

59.00

70.5

750

13,050

44,250

455

26,845

60.7

295

118

4,873

2,089

177

2,350

2,350

97

1,717

4,006

Silk/cotton twin set: short sleeved pullover

12.90

49.00

73.7

750

9,675

36,750

329

16,121

43.9

421

168

5,776

2,475

253

2,785

2,785

139

2,043

4,768

68.6

5,400

115,562 368,100

2,707

169,763

50.1

2,693

1,077

55,533

23,800

1,616

26,775

26,777

888

19,621

45,781

SKU

Balance on Hand

Balance on Hand

Total Total MarkDollar down Sales Dollars

Case Study 2 Twist of Fate Laree Waltemyer The Art Institute of York, Pennsylvania Mod Girl had been a vendor in the junior department for Norman’s department store for over six years. In this time, the junior dress buyer, Sharon Wayne, had built a good relationship with her sales representative, Loren. They worked well together and communicated openly about the successes and problem areas they had in doing business with each other. Sharon and the other junior department buyers were told by their Divisional Merchandise Manager (DMM) that they had just been approved to put together a spring booklet showcasing their merchandise. Sharon instantly thought of Mod Girl as one of her choices and knew just what dress she wanted to include; a lilac silk screened short dress with a sheer overlay. Due to the spring trend forecasts and early selling Sharon and her vendors already had on styles and colors, she knew this dress would be a success. With her DMM’s approval, she increased her outstanding order to 1,350 dresses that cost $13.50 each and retailed for $29.99 each, that would be delivered right before the drop date of the booklet to all 75 stores. Now all she had to do was wait for the dresses to arrive in stores and the booklet be delivered to homes. A few weeks later it was time and Sharon couldn’t wait to see the selling of her featured dresses; especially Mod Girl’s. The first week, eight lilac dresses were sold, or only 0.6% of the dresses. Sharon quickly was on the computer making sure the dresses actually made it to all of the stores in time for the booklet. Fortunately they did, but it didn’t help her figure out why the lilac dresses weren’t selling as well as she, and Loren, thought they would. Sharon decided to wait one more week to see if it was a style that just needed a little more time to take off. Much to her dismay, the second week was even worse; -3 dresses were sold, meaning that there were 3 more dresses returned than were sold. Sharon couldn’t figure out why they weren’t selling. The other styles in

the booklet were doing very well, with 5–10% sold each of the two weeks. Sharon knew she had to do some investigating on her own to find out why the sales were so poor. First she called Loren to see if anyone else was reporting problems with the dress. Loren told Sharon that he hadn’t received any other calls, but that she was one of the first stores to get the dress. Next, Sharon called a few of her stores and asked them to review circumstances surrounding the sale of the lilac dress—Where was it placed on the floor? How was it merchandised? What signage was used? How knowledgeable were the sales associates regarding the product? Was any additional product information needed to help sell the dress? Sharon also wanted to see if they had any complaints or comments from customers. Again the answer was no. Sharon wasn’t giving up until she figured the “mystery” out. She went to one of the other buyers, Audrey, who was a friend of hers and who luckily for Sharon had a junior figure. Sharon asked Audrey if she would try on the dress for her to see how it fits and what size she was. Sharon then went to the store closest to her corporate headquarters and transferred a dress to take with her. When she arrived back at corporate she had Audrey try on the dress. The instant Audrey had the dress on, Sharon could see and Audrey could feel the problem. The overlay was not sewn on to match up with the silk screen dress and it twisted the fabric and print around the body. It would not lay flat and was very uncomfortable to wear. Sharon then began calling other stores to have them check for the same problem. Unfortunately, the same problem was found at all of the locations she had called. Sharon knew there was no way she could sell this defective dress. She quickly sent out an e-mail for all stores to pull the dress off of the selling floor and to wait for further directions. When Sharon called Loren, Loren was very apologetic to her. He knew this was a larger buy for Sharon and that

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she had advertised it in a rather expensive promotional piece. Sharon decided on three different actions that would be acceptable to her to help with the problem. Sharon’s first proposal was that Mod Girl take back all of the unsold merchandise because it was unsalable. The second choice was to have them pay to have the dresses marked down 75%. Hopefully at this price, Sharon could get rid of a bunch of them. The last option was to pay to have the dresses marked down 50% and for Sharon to get a $9,000 credit for her next order with Mod Girl. Loren went to the owner of his company and described the situation and Sharon’s proposed actions for them to take. When Loren called Sharon back, he regrettably told Sharon that the owner of the company said that they won’t take any action and Sharon has to figure out on her own what to do with the damaged dresses because she owned them. Loren apologized and said it was out of his hands. Sharon couldn’t believe it—that they would not stand behind their merchandise and take responsibility for a defective dress they sold her. She didn’t have money in her markdown budget to take care of the dresses on her own and she didn’t want the dresses hurting the department’s and store’s image so she called Loren with one final proposal.

Mod Girl could either choose one of the three previous options to rectify the situation, or Sharon would cancel all outstanding orders with them ($48,000 at cost) and end their relationship entirely. Sharon couldn’t believe that it had to come to this, but she was going to stand her ground; either Mod Girl steps up to the plate and right their wrong, or their partnership was over. DISCUSSION QUESTIONS FOR CASE STUDY 2

1. How much would it cost Mod Girl (at retail) to return the remaining unsold dresses?

2. What are the amounts Mod Girl would have to pay (a) to have the remaining dresses marked down 75% and (b) to have them marked down 50% with the future order credit?

3. Which option would be in the best interest of Sharon and her department and why?

4. Which option would be in the best interest of Mod Girl to choose and why?

5. Why would Sharon be willing to take such a drastic action if Mod Girl chooses to not do anything about the defective dresses?

Case Study 3 Cinderella’s Shoes Jaeil Lee, Ph.D. Seattle Pacific University Cinderella’s Shoes has been successfully owned and operated for the past eight years by two young independent owners, Seung-hee and Nora. Cinderella’s is known for carrying stylish but comfortable shoes of high quality. Their assortment consists of men’s and women’s casual shoes, boots, and sandals, along with some dressy shoes and accessories. Seung-hee and Nora do most of their buying nationally. Each year they attend two major shoe markets as well as peruse the latest product releases offered by their top selling vendors. Cinderella’s is located in a busy area of downtown Seattle. The customer base consists of frequent foot traffics of tourists and local people. The target market is 25–45-year-old

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men and women who have casual and active lifestyles and a moderate to high level of expendable income. In the past year, Seung-hee and Nora set up a Web site to supplement their store sales. Although the online business is minimal, they expect it will provide service and convenience to their loyal customers and grow their business over time. Seattle is well known for its rain throughout the year so this spring Seung-hee and Nora would like to introduce a new women’s line of rainboots to their market. Currently, they are looking at a rainboot manufactured by Clark, one of the top selling national brands carried by Cinderella’s. The boot will cost $22.00 a pair. Although the manufacturer’s suggest

retail price (MSRP) for the boot is $56.00, Seung-hee and Nora would like to explore different pricing strategies for the rainboot before determining the best approach to launching the new product. DISCUSSION QUESTIONS FOR CASE STUDY 3

1. As fall and winter season comes to a close, Seung-hee and Nora want to empty some of their racks to create space for spring and summer items. To remove their winter boots from the rack, sheep skin winter boots were marked down from the original price of $165 to the final sale price of $39. What % markdown was taken for the sheep skin boots?

2. In the accessories category, socks are one of the convenience items offered for sale by Cinderella’s. Seunghee and Nora bought a dozen pairs of winter socks for $7 per pair with a 48.11% markup at retail. (a) What retail price was placed on each pair of socks? (b) Nine pairs sold at full retail, leaving three pairs of socks that were marked down 25% for a clearance. What was the clearance price on each of the remaining three pairs of socks? (c) How much were Cinderalla’s net sales for the entire dozen pairs of socks?

3. Seung-hee and Nora purchased 24 pairs of a style of walking shoes at a cost of $35.50 for each pair that retail at $69.99. The style was so successful that only six pairs remained in stock. When they reordered the style in the same and one additional color, however, the new stock had to be purchased at a cost of $40.00. (a) If Seung-hee and Nora want to price the 36 new and six remaining pairs of shoes at the same price, $74.99, what were the additional markup dollars on the remaining six pairs in inventory? (b) What was the additional markup percent on the remaining inventory? (c)What was the markup percent on the new (reordered) 36 pairs of walking shoes?

4. Seung-hee and Nora plan to add the Clark rainboots to their spring assortment. Consider two plausible different pricing strategies from the following list: prestige pricing, leader pricing, competitive pricing, everyday low pricing, and high/low pricing. Develop each of the two pricing strategies for the rainboot using a 13-week selling period in a table format.

5. Of the pricing strategies described in Question 4, which pricing strategy would you recommend? Justify your selection.

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INVENTORY VALUATION OBJECTIVES • To define and determine retail deductions. • To explain the differences among book inventory, physical inventory, and estimated physical inventory. • To define and calculate shortage based on book and physical inventory figures. • To understand why retailers use the retail method of inventory (RIM). • To calculate maintained markup and gross margin by means of the retail method of inventory. • To calculate gross margin return on inventory. KEY POINTS • A book inventory provides information on the value of the retailer’s inventory between physical inventories. • The amount of shortage that has occurred cannot be calculated without both book and physical inventories. • The retail method of inventory provides information that allows the calculation of gross margin at frequent intervals.

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Career Corner Internet Execution Senior Specialist Ashley Malfitano

Career Path

J. C. Penney Company, Inc.

While working toward my degree in Fashion Merchandising at Texas State University–San Marcos, I was very involved in the program and engaged in the many opportunities that would help me in the long term. I attended every career day and guest speaker, and built relationships to get help along the way. For my first job out of college, a family friend referred me to an event planning company where I held a contract position that allowed a lot of flexibility with a small business perspective. I helped them move from having only an e-commerce presence to having an actual store front by assisting them in opening their first location. In this job, my responsibilities included digital marketing, planning, some buying, and visual merchandising. After holding that position for two years, I began looking for a more stable position with fewer travel requirements. While as an alumnus on a return trip to Texas State, I met a career professional who was looking for an e-commerce site merchandiser. My background in the field helped me land the job, where I developed their new Web site from a merchandise standpoint. J.C. Penney later found me through my LinkedIn profile while looking to fill a similar role and recruited me to my current position as Internet Execution Senior Specialist. It has been interesting to see the differences between working for private and public companies.

Description of Job Responsibilities The Web site is my job, but not just the technical aspect. In my position as an Internet Execution Senior Specialist, I watch the business online and report my observations to the buyers, enabling them to make educated decisions. The buyers, with my assistance, plan what needs to be promoted online; then, it is my job to execute their plan on the Web site. I manage how the products get online and how they are taken down, as well as how they are merchandised on the site. I basically manage the dotcom and merchant side. My position is basically a Ashley Ogle Malfitano/JC Penney direct line to an assistant buyer position. Relevance of Merchandising Mathematics I use merchandise math in my current position every day! I watch my business closely and I want to always know where I am currently standing in sales and expenses for the category that I manage. This allows me to fully understand what actions I need to take to help my business to not only increase sales, but also make the bottom line profitable at the rate that I am held to for my yearly goals.

Advice for Students Interested in Merchandising Careers Start networking and researching companies the moment you decide you want to major in merchandising. It is so important to join professional organizations in the field. I am a firm believer in networking and professionalism. You must understand when you are interacting with professionals and know when to act like a college student versus acting like a professional. If you act correctly, the right opportunities will come your way. Life will give you opportunities; you just have to go with them. At the right time, great things will come. Do your homework and always be prepared for those opportunities.

A retailer must know how much stock is on hand in order to determine how much to purchase and to calculate profit. The actual counting of merchandise, a physical inventory, is time consuming and expensive; consequently, most retailers take a complete physical inventory only once or twice a year. In between physical inventories, the value of merchandise on hand can be determined from accounting records. In all but the smallest retail firms, the accounting or statistical department maintains separate records for each department. The inventory at the beginning of the period is adjusted to reflect purchases, sales, returns, price changes, and so forth, as they occur. This adjustment provides the retailer with a perpetual inventory, because the value of the inventory can be determined at any time. A perpetual inventory is also referred to as a book inventory, since it is based on the accounting “books” or records. A book or statistical inventory requires the day-to-day recording of all movements of merchandise in and out of the department. It gives the buyer the total retail value of the stock at any time. It is important to remember that the terms stock and inventory are used interchangeably.

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In order to maintain a book inventory, one copy of each transaction affecting the value of the inventory— sales, purchases, price changes, transfers, returns to vendors, and customer returns—must be sent to the ­accounting office. In practice, however, the book inventory is reported to buyers and major executives at predetermined ­intervals, such as every 7 days, every 10 days, or every month.

Calculation of Book Inventory The disadvantage of utilizing a perpetual inventory is that extensive records must be maintained because everything that affects the value of the inventory must be reported. Care must be taken that purchases, returns to vendors, sales, customer returns, employee discounts, special customer discounts, transfers, markdowns, markdown cancellations, and additional markups are accurately reported. Transactions that increase the value of the inventory include purchases, transfers in, customer returns, markdown cancellations, and additional markups. Transactions that reduce the value of the inventory include sales, returns to vendors, markdowns, revisions downward, transfers out, and employee discounts. Book Inventory  Total Merchandise Handled  Total Retail Deductions

Total Merchandise Handled Total merchandise handled is the sum of the beginning inventory, plus net receipts (both transfers and purchases) and adjustments for additional markup and markup cancellations. (When they occur, additional markup and markup cancellations must be kept separate from markdowns and markdown cancellations.) A subsequent section on the retail method of inventory will explain why it is important to classify price changes accurately. Total merchandise handled is affected by the following variables: Beginning Inventory.  When a physical inventory figure is available, it is used because a physical inventory figure is more accurate than a book inventory figure. Net Purchases.  Returns to vendors (RTVs) are subtracted from gross purchases. Net Transfers.  Merchandise is frequently transferred between stores and may be transferred between departments. A transfer in is treated like a purchase; a transfer out is treated like an RTV. Net Price Revisions.  Additional markup (markon) and markup cancellation (also known as a downward revision) are price changes that affect the value of total merchandise handled.

Example 7-1 Determine the value of total merchandise handled from the following figures:



Opening inventory

$20,000

Gross purchases

$10,000

RTV

$450

Transfers out

$350

Transfers in

$150

Additional markup

$64

Additional markup cancellation

$16

Inventory Valuation 175

Solution: Merchandise Handled Opening inventory

$20,000

Gross purchases

$10,000 -

(minus) RTV

450

Net purchases

9,550

Transfers out

$350 -

(minus) Transfers in

150 - 200*

Net transfers out Additional markup

64 -

(minus) Additional markup cancellation

16

Net additional markup

48** $29,398

Total merchandise handled NOTE: *Transfers out exceeded transfers in; **Additional markup increases the retail value of total merchandise handled.

Retail Deductions It is important to use net figures in determining total deductions. Sales are adjusted by the amount of customer returns and allowances; markdowns are reduced by markdown cancellations. Net Sales.

Customer returns and allowances are subtracted from gross sales.

Net Markdowns.

Markdown cancellations are subtracted from markdowns.

Discounts to Employees (and any other special customers).

These discounts reduce the amount of

sales that can be achieved from an inventory; thus, they must be treated as deductions from total merchandise handled.

Example 7-2 Calculate the total deductions and closing book inventory from the following figures: Total merchandise handled

$29,398

Gross sales

$9,870

Customer returns

$642

Employee discounts

$380

Markdowns

$936

Markdown cancellations

$76

Solution: $29,398

Total merchandise handled Deductions: Gross sales (minus) Customer returns

$9,870 - 642

Net sales

$9,228 $936

Markdowns (minus) Cancellations Net markdowns Total deductions Closing book inventory

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-

76 $ 860 380 - 10,468 $18,930

Maintaining a book inventory requires time and constant monitoring of all records. Failure to record any information involving an increase or a decrease in the value of an item of merchandise will result in an error in the valuation of book inventory. For example, suppose 36 dresses that originally retailed for $80 are marked down to $58. This is a markdown of $22 per dress. If only 30 dresses are reported to have been reduced, the accounting records will overstate the inventory by $132 ($22 * 6 = $132). Discrepancies in inventory figures can be caused by errors in completing forms or in posting information to accounting records. Stores that use computerized sales registers can check for the correct price, regular or reduced, according to style number; consequently, they have fewer markdown errors. Problems still occur, however, due to incorrect ticketing, missing tags, incorrect handling of customer returns, incorrect entry of information into the computer, and so forth.

Practice Problems • Exercise 7.1 1. Calculate closing book inventory, given the following information: Opening inventory

$287,219

Gross purchases

$122,756

RTV

$3,176

Net transfers in

$4,320

Additional markup Net sales Markdowns Markdown cancellations Employee discounts

$170 $126,970 $10,835 $720 $4,540

2. Calculate (a) total merchandise handled and (b) closing book inventory, given the following information: Opening inventory Net purchases

$76,346 $168,754

Transfers in

$1,346

Transfers out

$1,896

Gross sales

$180,920

Customer returns

$10,240

Markdowns

$16,710

Markdown cancellations Employee discounts

$496 $2,080

3. Calculate (a) total merchandise handled and (b) closing book inventory, given the following information (factors may not be listed in the order they are to be used): Opening inventory

$36,728

Gross purchases

$87,317

RTV Transfers in Transfers out Additional markup Gross sales

$1,117 $984 $1,576 $96 $87,843 Inventory Valuation

177

Customer returns

$4,981

Markdowns

$6,516

Markdown cancellations Employee discounts

$423 $2,015

4. Calculate closing book inventory, given the following information: Gross purchases

$567,416

Opening inventory

$117,260

Transfers in

$9,368

Transfers out RTV

$11,980 $5,424

Markdowns

$32,968

Markdown cancellations Gross sales

$976 $582,390

Employee discounts Customer returns

$2,956 $49,203

Calculation of Shortage When the retailer takes a physical inventory, he or she compares the actual value of the inventory, as determined by the physical count, with book inventory and adjusts the books so that they agree with the physical inventory. Shortage or shrinkage is the difference between physical and book inventory when the physical inventory is less than book inventory. If the physical inventory is larger than book inventory, an overage exists. Shortage or shrinkage. Overage.

Occurs when book inventory is larger than physical inventory.

Occurs when physical inventory exceeds book inventory.

The amount of shortage or overage that has occurred can be determined only by comparing physical and book inventories. Of course, the most common situation is for the physical inventory to be smaller than book inventory. Nearly all overages are caused by clerical errors. For example, when a customer returns merchandise, an overage will result if the return is not recorded. As you learned in Chapter 6, shortages are caused by the physical loss of merchandise and by clerical errors. Most physical loss is the result of theft; however, merchandise can be lost through breakage, incorrect measuring or weighing, and giving away samples. Improper handling of sales transactions, incorrect counting of merchandise, and failure to record merchandise that is on loan can also contribute to shortage. Merchandise shortage is a major drain on profit. Many stores have found that loss from internal theft (pilferage by employees) can be as large as loss from external theft. Shortage in excess of what is considered “normal” indicates a need for careful evaluation of security procedures and record keeping. The University of Florida conducts an annual National Retail Security Survey (NRSS). The university’s 2010 survey found that shortage represented 1.44 percent of total retail sales. According to the National Retail Federation, “Most loss-prevention executives in the NRSS (National Retail Security Survey) felt employee theft was their biggest problem, representing 43 percent 178

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of all losses. Shoplifting was another 35 percent, while 14.5 percent was administration error and 3.8 percent, vendor fraud.”1 Amount of Shortage  Book Inventory  Physical Inventory Shortage Percent  Amount of Shortage  Net Sales

Example 7-3 During the spring season (February 1 through July 31), the lingerie department had net sales of $350,000. On July 31, a physical inventory showed $87,110 worth of merchandise. The book inventory showed $92,610. What was the shortage percent for the season? Solution: Book inventory

$92,610

Shortage % = $5,500 , $350,000

Physical inventory

-87,110 $5,500

= 1.57%

Shortage

Example 7-4 Determine the shortage or overage percent for a department with the following figures: Opening inventory

$75,000

Gross purchases

$548,000

Net transfers in

$520

Additional markup

$86

Returns to vendors

$10,200

Gross sales

$531,800

Customer returns

$27,000

Markdowns

$33,100

Employee discounts

$2,450

Markdown cancellations Physical closing inventory

$900 $68,014

Solution:    Opening inventory

$75,000

   Gross purchases

$548,000

   RTV

- 10,200

   Net purchases

$537,800

   Net transfers in

520

   Additional markup

86

Total merchandise handled

$613,406

   Deductions:    Gross sales

$531,800

   Customer returns

- 27,000

   Net sales    Markdowns    Markdown cancellations

$504,800 $33,100 - 900

   Net markdowns    Employee discounts Total deductions Closing book inventory Physical inventory Shortage

$32,200 2,450 - 539,450 $73,956 - 68,014 $5,942

Shortage % = $5,942 , $504,800 = 1.18%

1



National Retail Federation (2011) www.nrf.com Inventory Valuation 179

Practice Problems • Exercise 7.2 1. Determine, on the basis of the following figures, the shortage or overage percent. Opening inventory

$190,000

Gross purchases

$315,000

RTV

$21,000

Transfers in

$10,500

Transfers out Customer returns

$8,400 $21,500

Gross sales

$311,000

Markdowns

$12,600

Markdown cancellations

$1,600

Employee discounts

$3,400

Closing physical inventory

$176,700

2. Determine the shortage or overage percent under the following conditions: Opening inventory

$78,000

Gross purchases

$117,500

RTV Gross sales Customer returns Markdowns

$6,000 $62,400 $5,900 $11,340

Markdown cancellations

$780

Additional markon

$280

Closing physical inventory

$123,180

3. Calculate the shortage or overage percent, given the following factors (not necessarily in the order they are to be used).

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Opening inventory

$36,842

Gross purchases

$102,351

Transfers in

$8,526

Transfers out

$9,893

Markdowns

$14,618

Markdown cancellations

$976

Additional markup

$134

Returns to vendors Gross sales

$3,239 $96,527

Customer returns

$9,827

Employee discounts

$1,068

Closing physical inventory

$34,319

4. Calculate the shortage or overage percent, given the following information: Opening inventory

$685,680

Gross purchases

$234,360

RTV

$5,210

Freight

$640

Transfers in

$1,210

Transfers out

$1,690

Gross Sales

$298,720

Customer returns

$21,158

Additional markup

$540

Net markdowns Employee discounts Closing physical inventory

$33,490 $1,970 $599,203

Estimated Shortage In calculating the book inventory of merchandise that typically has large shortages, the amount of shortage that probably has occurred is estimated, on the basis of past experience. When a physical inventory is taken, it is important to calculate the shortage that actually has occurred. The term estimated physical inventory is used to describe the value of the inventory as determined from records after an adjustment has been made for estimated shortage. Adjustments for shortage are calculated as a percent of net sales. For example, during a period when net sales totaled $186,000 and shortage was estimated at 1.4%, the estimated amount of the shortage was $2,6041$186,000 * 1.4%2

Example 7-5 Calculate (a) estimated shortage and (b) estimated physical inventory, using the following information: Opening inventory

$16,400

Net purchases

$84,300

Net sales

$76,000

Net markdowns

$3,600

Employee discounts

$2,200

Estimated shortage

1.6%

Inventory Valuation

181

Solution: Opening inventory Net purchases

$16,400 84,300

Total merchandise handled

$100,700

Deductions: $76,000

Net sales Net markdowns

3,600

Employee discounts

2,200

Total deductions

– 81,800

Closing book inventory Estimated shortage ( $76,000 * 1.6%) Estimated physical inventory

$18,900 – 1,216 (a) $17,684 (b)

It is important to understand the differences among the following terms: Book Inventory.

The value of the inventory as determined from records rather than a physical count.

Physical Inventory. Estimated Shortage.

The value of the inventory as shown by an actual count of the merchandise. The amount of shortage that probably has occurred on the basis of past experience.

Estimated Physical Inventory.

The value of the inventory as determined by book inventory after an

adjustment has been made for estimated shortage. It is unrealistic to expect that shortages can be eliminated completely; however, if a satisfactory profit is to be earned, shortages must at least be controlled. Most companies hold management responsible for keeping shortage at an acceptable level by making shortage percent a component of their performance review or a bonus incentive.

Practice Problems • Exercise 7.3 1. Calculate the estimated amount of shortage if net sales totaled $280,000 and shortage was estimated at 2.8%.

2. Given the following information, find: (a) Estimated physical inventory and (b) actual shortage percent if the closing physical inventory is valued at $32,800: Net sales Markdowns Employee discounts

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$84,055 $2,520 $864

Opening inventory

$30,420

Net purchases

$91,350

Net transfers out

$670

Estimated shortage

1.4%

3. A retail store had an opening inventory of $34,000. Net purchases totaled $7,800, gross sales were $14,250, customer returns amounted to $1,115, and net markdowns totaled $480. Find (a) closing book inventory and (b) estimated physical inventory if shortages were estimated to be 1.2%.

4. Given the following information, find (a) closing book inventory, (b) actual shortage or overage percent if physical inventory is $17,326, and (c) estimated physical inventory when shortages are estimated to be 0.85%: Opening inventory

$15,860

Gross purchases

$35,200

Additional markon

$36

Transfers in

$870

Transfers out

$520

RTV

$980

Gross sales

$29,846

Markdowns

$3,116

Markdown cancellations

$48

Customer returns

$180

Employee discounts

$710

Methods of Inventory Valuation Sales are made and reported in retail values; yet, the calculation of profit and loss requires knowing the cost value of opening and closing inventories so that the cost of merchandise sold can be calculated. There are two basic ways to value inventory: the retail method and the cost method. Management must decide which method of inventory valuation is to be used.

The Retail Method of Inventory Valuation Today, most moderate and large-sized retail firms use the retail method of inventory (also known as the retail inventory method, or RIM) to determine the cost value of their inventories. The merchandise in a department typically includes some items that have been marked down. The retail method of inventory valuation allows this depreciation in retail to be reflected in the cost value of the inventory. Retail Inventory Method (RIM) A procedure whereby the approximate cost value is determined from the retail value. In almost every department, there are items that have been marked down. One advantage of the retail method is that this reduction (markdown) in retail value results in a corresponding reduction in the cost value of the inventory. The retail method of inventory valuation results in an inventory figure that is the lower of cost or market value. The retail method of inventory valuation requires the maintenance of a book inventory, in addition to records that allow for calculation of the cost of total goods handled. The advantages and limitations of RIM will be easier to understand after the procedure is used. Many of the steps in RIM involve concepts already learned. In this regard, it may be helpful to review cumulative markup, cost of merchandise sold, and book inventory. Inventory Valuation

183

Steps: 1. Calculation of total value of merchandise handled at both retail and cost. 2. Calculation of cost percent of total merchandise handled. (Cumulative markup can be calculated.) 3. Calculation of closing book inventory at retail. 4. Calculation of approximate cost value of closing book inventory. The preceding steps give the complete inventory valuation at cost; however, two more steps are necessary for the determination of gross margin. 5. Calculation of gross cost of merchandise sold. (Maintained markup can now be calculated.) 6. Calculation of total cost of merchandise sold. 7. Calculation of gross margin $ and gross margin %. Example 7-6 shows the correct way to set up a problem. SUGGESTION: In order to avoid confusion, it is very important to keep cost and retail values in separate columns. It may be helpful to draw a line between the cost and retail columns and to work these problems on lined paper or in a computer spreadsheet program such as Excel.

Example 7-6 Calculate gross margin % given: Cost ($)

Retail ($)

Cost

Retail ($)

Opening inventory

15,000

25,000

Additional markup

xx

24

Gross purchases

6,000

10,000

Gross sales

xx

8,750

RTV

300

500

Customer returns

xx

435

Freight

240

xx

Markdowns

xx

189

Cash discounts

199

Markdown cancellations

xx

39

Alteration costs

37

Employee discounts

xx

55

Solution: Cost

Retail

Step 1: Calculate cost and retail of total merchandise handled Opening inventory Gross purchases RTV

$15,000

$25,000

$6,000

$10,000

300

500

Net purchases Freight

5,700

9,500

240

xx

Additional markup

xx

Total merchandise handled

24 $20,940

$34,524

Step 2: Calculate cost % of total merchandise handled Cost of total merchandise handled ÷ retail of total merchandise handled $20,940 ÷ $34,524 ⴝ

60.6535%

Step 3: Calculate total deductions and closing book inventory (retail) Deductions Gross sales Customer returns

$8,750 435

Net sales Markdowns Markdown cancellations 184

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$8,315 189 39

(Continued) Net markdowns

150

Employee discounts

55

Total deductions

$8,520

Closing book inventory (retail) ⴝ total merchandise handled ⴚ total deductions

$26,004

Step 4: Calculate cost value of closing book inventory Retail value of closing book inventory * cost % $26,004 : 60.6535%

$15,772

Step 5: Calculate gross cost of merchandise sold Cost of total merchandise handled ⴚ cost value of closing book inventory $20,940 ⴚ $15,772 ⴝ

$5,168

Step 6: Calculate total cost of merchandise sold Cash discounts (minus)

199

Net cost of merchandise sold

$4,969

Alteration costs (plus)

37

Total cost of merchandise sold

$ 5,006

Step 7: Calculate gross margin $ and gross margin % Gross margin $ ⴝ net sales ⴚ total cost of merchandise sold Gross margin $ ⴝ $8,315 ⴚ $5,006 ⴝ

$3,309

Gross margin % ⴝ gross margin ⴜ net sales Gross margin % ⴝ $3,309 ÷ 8,315 ⴝ

39.80%

Step 1: Calculation of cost and retail values of total merchandise handled.

Earlier in this chapter, you

learned how to calculate the retail value of merchandise handled. This step requires using the cost value of these same factors, plus a consideration of freight charges. As discussed in Chapter 4, transportation charges required to get merchandise to the store or distribution center are part of the cost of the merchandise. Some factors, such as purchases and transfers, affect both cost and retail values, whereas other factors affect only cost or only retail. Remember, price revisions such as additional markup and markup cancellations affect the value of goods handled, whereas markdowns and markdown cancellations are retail deductions. Step 2: Calculation of cost percent of total merchandise handled. Cost percent can be calculated directly from the cost and retail values of total merchandise handled. In Example 7-6, the cost percent is 60.65%. Cost % ⴝ Cost of Total Merchandis Handled ⴜ Retail of Total Merchandise Handled Cost % = $20,940 , $34,524 = 60.65% Step 3: Calculation of closing book inventory, a retail value. Retail deductions (net sales, net markdowns, and employee discounts) are deducted from total merchandise handled to provide the retail value of the closing book inventory. In the example, closing book inventory is $26,004. Closing Book Inventory ⴝ Total Merchandise Handled ⴚ Total Retail Deductions Closing book inventory = $34,524 , $8,520 = $26,004 NOTE: When a physical inventory is taken, the value of the actual physical inventory, rather than the book inventory, is used in Step 4. Also, at that time, it is possible to calculate the actual shortage or overage. Inventory Valuation

185

Step 4: Calculation of approximate cost value of the closing book inventory.

The retail value of the closing

book or physical inventory (when available) is converted to its approximate cost value by multiplying the retail value by the cost percent calculated in Step 2. In the example, the cost value of the closing inventory is $15,772. In doing the calculation using the cost percent correct to two decimal places (60.65%), the cost value of the closing book inventory will be $15,771. Cost of Closing Book Inventory ⴝ Retail Value of Closing Book Inventory : Cost % Cost value of closing book inventory = $26,004 * 60.6535% = $15,772 Step 5: Calculation of gross cost of merchandise sold.

Gross cost of merchandise sold is the difference

between the cost value of total merchandise handled and cost value of the ending inventory (closing book inventory). In the example, gross cost of merchandise sold is $5,168. Gross Cost of Merchandise Sold ⴝ Cost of Merchandise Handled ⴚ Cost of Ending Inventory Gross cost of merchandise sold = $20,940 - $15,772 = $5,168 Step 6: Calculation of total cost of merchandise sold. To arrive at the total cost of merchandise sold, the gross cost of merchandise sold is adjusted by cash discounts and alteration costs; cash discounts are subtracted and alteration costs are added. Thus, in our example, we have the following calculation: Net Cost of Merchandise Sold ⴝ Gross Cost of Merchandise Sold ⴚ Cash Discounts Net cost of merchandise sold = $5,168 - $199 = $4,969 Total Cost of Merchandise Sold ⴝ Net Cost of Merchandise Sold ⴙ Alteration Costs Total cost of merchandise sold = $4,969 + $37 = $5,006 Step 7: Calculation of gross margin $ and gross margin %. Gross Margin $ ⴝ Net Sales ⴚ Total Cost of Merchandise Sold Gross Margin $ = Net Sales - Total Cost of Merchandise Sold Gross margin $ = $8,315 - $5,006 = $3,309 Remember, gross margin $ is the difference between net sales and total cost of merchandise sold. To determine gross margin %, divide gross margin $ by net sales. Gross Margin % = Gross Margin $ , Net Sales Gross Margin % = $3,309 , $8,315 = 39.80% If the calculations are made using $15,771 as the cost value of closing inventory, the gross margin percent will be 39.78%. Review the seven steps: 1. Calculation of total value of merchandise handled at both retail and cost. 2. Calculation of cost percent for total merchandise handled. 3. Calculation of closing book inventory at retail value. 4. Calculation of approximate cost value of closing inventory. (Use the physical inventory when this value is known.) 5. Calculation of gross cost of merchandise sold. 6. Calculation of total cost of merchandise sold. 7. Calculation of gross margin $ and gross margin %.

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Example 7-6 shows the gross margin calculation using the ending inventory as determined by the accounting records. This “book” inventory value does not take into consideration shortages that have occurred. Remember, shortages are merchandise that cannot be sold; consequently, shortages reduce gross margin. If a physical inventory (value) is not available, most retailers will use an estimated physical inventory to calculate gross margin. The estimated physical inventory reflects some shortage each month, resulting in a slightly lower gross margin than does the “book” inventory figure. Think about the differences in these terms: ending “book” inventory, estimated physical inventory, and physical inventory. Which one of these values will be or will reflect the actual value of the merchandise? The physical inventory is an actual count. The estimated physical inventory is a value that reflects shortage that probably has occurred. When solving problems, use the ending inventory value that is or is closest to the actual value. If a physical inventory is given, convert it to cost. If no physical inventory is given, see if an estimated shortage percent is given. If so, calculate estimated physical inventory and convert it to cost to finish the problem. (See Example 7-7.)

Example 7-7 Calculate gross margin % given: Cost ($)

Retail ($)

Opening inventory

140,960

287,640

Gross purchases

47,520

98,300

1,010

2,180

Freight

810

xx

Cash discounts

696

Alteration costs

450

RTV

Estimated shortage

Cost

Retail (4)

Additional markup

xx

230

Gross sales

xx

112,430

Customer returns

xx

11,020

Markdowns

xx

14,210

Markdown cancellations

xx

1,980

Employee discounts

xx

830

0.95%*

*Must be deducted.

Solution: Cost

Retail

Merchandise handled Opening inventory Gross purchases Returns to vendors Net purchases Freight Additional markup

$140,960

$287,640

$47,520

$98,300

1,010

2,180 46,510

96,120

810

xx

xx

230

Total merchandise handled

$188,280

$383,990

Cost % of total merchandise handled Cost % = $188,280 ÷ $383,990 =

49.0325%

Deductions Gross sales Customer returns Net sales

$112,430 11,020 $101,410 (Continued)

Inventory Valuation

187

(Continued) Markdowns

14,210

Markdown cancellations

1,980

Net markdowns

12,230

Employee discounts

830

Total deductions

$114,470

Closing book inventory (retail) = Total merchandise handled - Total deductions Closing book inventory = $383,990 − $114, 470 =

$269,520

Estimated shortage = Net sales * Estimated shortage % $101,410 × 0.95% =

963

Estimated physical inventory = Closing book inventory - Estimated shortage $269,520 - $963 =

$268,557

Closing estimated physical inventory (cost) = Estimated physical inventory * Cost % $268,557 * 49.0325% =

131,680

Gross cost of merchandise sold

$56,600

Cash discounts (minus)

696

Net cost of merchandise sold

$55,904

Alteration/workroom costs (plus)

450

Total cost of merchandise sold

$56,354

Gross Margin $ = Net sales - Total cost of merchandise sold Gross margin $ = $101,410 − $56,354 =

$45,056

Gross Margin % = Gross margin $ ÷ Net sales Gross margin % = $45,056 ÷ $101,410 =

44.43%

The main purpose of RIM is to determine the cost value of the ending inventory so that cost of merchandise sold and, consequently, gross margin can be calculated without having to take a physical inventory. This allows for frequent, perhaps monthly, calculations of cost of merchandise sold and gross margin without taking a physical inventory each time. The use of an estimated physical inventory value (closing book inventory, adjusted for probable shortage) results in a gross margin that is adjusted for shortage. The retail method of inventory is an important merchandise management tool because it provides information for regular and frequent evaluation. Potential problems can be identified and adjustments made prior to the end of the season or year. Figure 7-1 is an example of a form that might be used by a smaller store for calculating gross margin. The form allows for the calculation of gross margin every three months rather than every month. When an actual physical inventory is taken, that figure will be used on line 20. This form allows for estimated shortage for each period (every three months). (See line 17.)

Original-Cost Method of Inventory Valuation The cost method of inventory valuation may be used by firms whose turnover is slow or inventory is small in comparison to sales volume. Retail firms with slow turnover or large unit sales may use a cost method based on maintenance of a book inventory at cost. A company that has high-priced items, such as a furniture or appliance 188

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Store Department Line #

Department Stock Ledger Cost:

1

Beginning inventory

2

Purchases

3

Transportation

4

Transfers in (plus)

5

Transfers out (minus)

6

Total Merchandise Handled

Per 1

Per 2

Per 3

Per 4

Year

$15,000 5,700 240

20,940

Retail: 7

Beginning inventory

8

Purchases

9

Markups

25,000 9,500 24

10

Transfers in (plus)

11

Transfers out (minus)

12

Total Merchandise Handled

13

Cost % (Line 6 ÷ Line 12)

60.65%

14

Cumulative markon %

39.35%

34,524

(100% – Line 13) 15

Net sales

8,315

16

Markdowns

17

Shrinkage provision

18

Sales discounts

19

Total Retail Deductions

20

Ending inventory (Line 12 – Line 19)

26,004

21

Ending inventory at cost (Line 20 × Line 13)

15,771

150 55 8,520

Gross Margin 22

Gross cost of merchandise sold

5,169

(Line 6 – L ine 21) 23

Maintained markup $

3,146

(Line 15 – Line 22) 24

Maintained markup %

37.84%

25

Cash discounts earned

199

26

Alteration/Workroom costs

27

Total cost of merchandise sold

37 5,007

(Line 22 – Line 25 + Line 26) 28

Gross margin (Line 15 – Line 27)

29

Gross margin %

3,308 39.78%

(Line 28 ÷ Line 15) FIGURE 7-1 Form for calculation of gross margin by a small store Inventory Valuation

189

store, might put the cost on the price ticket by using a code. When the item is sold, this portion of the price ticket is retained in order to maintain a book inventory at both cost and retail. An alternative method of maintaining book inventory at cost is to refer to the vendor’s invoice for cost information as items are sold. This method is appropriate only when the number of transactions is limited and items have a high unit value.

Advantages and Disadvantages of the Retail Method of Inventory (RIM) The extensive record keeping that is necessary for a book inventory can be a disadvantage. As you learned earlier, any transaction affecting the retail value of the inventory must be recorded. All transactions that affect the value of the inventory must be reported to the information management/statistics office. Some small retailers—especially those which sell very high-priced items—believe that the retail method is too complex and time consuming. Since RIM uses a cost percent that is the average over a certain period, it may result in a closing cost value that is not an exact figure. If markup on merchandise has varied, as might be the situation when some merchandise is brought into the store for a special sale, the merchandise sold first may be the merchandise on which the lowest markup was taken. The actual goods left in the inventory may be goods on which a higher, more typical, markup was taken. This is not a major concern to most retailers. However, it does point out the importance of maintaining separate records for each department or, in some instances, for major merchandise classifications. Many retailers consider the retail method superior to the cost method for the following reasons: • It allows for more efficient management of merchandise. • It is more accurate. • It may be less expensive. • It is more flexible.

Suggestions for Working RIM Problems Example 7-8 introduces two new factors that influence the calculation of gross margin when they occur. In this example, a rebate has been received from a manufacturer. The rebate reduces the cost of the merchandise handled, just as a consumer rebate ultimately reduces the cost of a purchase for the consumer. Also, in Example 7-8, there is a markup cancellation that reduces the retail value of the total merchandise handled. A markup cancellation affects only the retail value and must be subtracted. The factors in Example 7-8 have not been separated according to whether they affect the total merchandise handled or deductions. Before starting to work a problem, determine in which part of the problem each factor will be used. In many schools, students are doing RIM problems with a computer spreadsheet. In this book, we recommend that at least two of the practice problems in Exercise 7.4 be worked on lined notebook paper, to ensure that calculations are understood. RIM problems can also be done in any computer laboratory or on a home computer. Example 7-8 illustrates how RIM problems can be set up on a spreadsheet. Utilizing a computer spreadsheet makes it easy to do “what if” problems. For instance, how much would the gross margin percent in Example 7-8 increase if net markdowns were reduced from $6,626 to $4,800? When the individual values and correct formulas have been entered into a spreadsheet, a change in any one value immediately changes all the other numbers that utilized the revised value. (See Example 7-9.) With the exception of net markdowns, Example 7-9 uses the same information as Example 7-8. A comparison of the two examples shows that gross margin improves by 1.3% (42.45% vs. 43.75%) if net markdowns can be reduced to $4,800. 190

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Example 7-8 Calculate gross margin, given: Cost ($)

Retail ($)

Opening inventory

31,458

56,680

Gross sales

Gross purchases

41,860

84,320

Customer returns

6,920

Returns to vendors

440

820

Markdowns

6,843

Cash discounts

621

Markdown cancellation

217

Rebate*

180

Employee discounts

934

Additional markup Markup cancellation*

360 90

Cost ($)

Retail ($) 80,760

Freight

970

Alteration costs

417

*Must be deducted.

Solution: Cost

Retail

Merchandise handled Opening inventory Gross purchases Returns to vendors Net purchases

$31,458

$56,680

$41,860

$84,320

440

820 41,420

Freight

970

Rebate

180

83,500

Additional markup

360

Markup cancellation

90

Net additonal markup

270

Total merchandise handled Cost %

$73,668

$140,450

52.45%

Deductions Gross sales

80,760

Customer returns

6,920

Net sales

73,840

Markdowns

6,843

Markdown cancellation

217

Net markdowns

6,626

Employee discounts

934

Total Deductions

Closing book inventory

81,400

30,973

$59,050

(Continued)

Inventory Valuation

191

(Continued) Gross cost of merchandise sold

$42,695

Cash discounts (minus)

621

Net cost of merchandise sold

$42,074

Alteration/workroom costs (plus)

417

Total cost of merchandise sold

$42,491

Gross margin $

$31,349

Gross margin %

42.45%

Example 7-9 Calculate gross margin, given: With the exception of net markdowns, all values are the same as in Example 7-8. Cost ($)

Retail ($)

Opening inventory

31,458

56,680

Gross sales

Gross purchases

41,860

84,320

Customer returns

6,920

Returns to vendors

440

820

Net markdowns

4,800

Cash discounts

621

Rebate*

180

Additional markup

90

Retail ($) 80,760

Employee discounts 360

Markup cancellation*

Cost ($)

934

Freight

970

Alteration costs

417

*Must be deducted.

Solution: Cost

Retail

Merchandise handled Opening inventory Gross purchases Returns to vendors Net purchases

$31,458

$56,680

$41,860

$84,320

440

820 41,420

Freight

970

Rebate (minus)

180

83,500

Additional markup

360

Markup cancellation (minus)

90

Net additonal markup

270

Total merchandise handled: Cost %

$73,668

$140,450

52.45%

Deductions: Gross sales Customer returns

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80,760 6,920

(Continued) Net sales

73,840

Markdowns Markdown cancellation Net markdowns

4,800

Employee discounts

934

Total deductions

79,574

Closing book inventory

31,930

Gross cost of merchandise sold

$60,876

$41,738

Cash discounts (minus)

621

Net cost of merchandise sold

$41,117

Alteration/workroom costs (plus)

417

Total cost of merchandise sold

$41,534

Gross margin $

$32,306

Gross margin %

43.75%

Practice Problems • Exercise 7.4 Work the problems that follow on lined paper. In some practice problems, factors will not be given in the order in which they need to be used. 1. Given the following information, calculate (a) closing book inventory, (b) cost value of closing inventory, and (c) gross cost of merchandise sold: Cost ($)

Retail ($)

Opening inventory

39,500

77,400

Gross purchases

69,000

136,000

640

1,200

RTV Additional markup

800

Markup cancellation

320

Freight Gross sales

3,260 117,000

Customer returns

2,500

Markdowns

9,300

Markdown cancellations

460

Inventory Valuation

193

2. Calculate (a) closing book inventory, (b) shortage percent, and (c) gross cost of merchandise sold, given the following information: Cost ($)

Retail ($)

Opening inventory

16,400

34,600

Net purchases

10,800

21,300

Freight

580

Additional markup Rebate from vendor

180 230

Gross sales

24,700

Customer returns

1,080

Net markdowns

2,120

Closing physical inventory

29,860

3. Given the following information, determine (a) gross cost of merchandise sold, (b) total cost of merchandise sold, and (c) gross margin percent (factors may not be in the order they are to be used): Cost ($)

Retail ($)

Opening inventory

31,680

58,426

Gross purchases

86,780

168,342

RTV

2,320

4,127

Freight

1,018

Additional markup

345

Markdowns

11,136

Markdown cancellations

476

Employee discounts

480

Transfers out

2,324

4,470

Transfers in

1,550

2,980

Gross sales

168,050

Customer returns

12,378

Physical closing inventory*

53,672

Cash discounts

2,957

Alteration costs

832

NOTE: *When the physical closing inventory is available, it is converted to cost in place of the closing book inventory.

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4. Determine gross margin percent, given the following information: Cost ($)

Retail ($)

Opening inventory

147,460

289,130

Gross purchases

452,660

1,005,780

Cash discounts

6,470

Additional markup

540

Freight

29,730

Returns to vendors

2,690

5,380

Gross sales

870,430

Markdowns

216,910

Markdown cancellations

13,680

Customer returns

81,760

Employee discounts Alteration costs

2,780 720

Closing physical inventory

282,771

Gross Margin Return on Inventory (GMROI) A good measure of inventory profitability is gross margin return on inventory (GMROI). GMROI is a ratio that measures the efficiency of the investment in inventory. It is calculated by dividing the dollar gross margin by average inventory at cost, which in turn is calculated by adding the beginning-of-the-month (BOM) cost inventory for each month in the period plus the end-of-the-month (EOM) cost inventory for the last month in the period and dividing by 7 for a season or 13 for a year. GMROI indicates whether an adequate gross margin is being earned compared with the investment in inventory required to generate those margin dollars. Although GMROI can be used at the total company level, it is more useful when applied to individual product categories. GMROI is stated in terms of the number of times gross margin is earned on inventory. Most retailers use GMROI to measure the relative performance of departments or merchandise categories. GMROI 

Gross Margin % : Turnover (100%  Markup%)

GMROI  Gross Margin $  Average Inventory at Cost

Example 7-10 Calculate GMROI for a six-month season from the following data: Gross margin

$365,945

Inventory at Cost:



BOM stock August

$75,400

BOM stock September

$80,200

BOM stock October

$82,000

BOM stock November

$95,000

BOM stock December

$92,000

BOM stock January

$72,000

EOM stock January

$68,000 Inventory Valuation 195

Solution: Step 1: Find the average cost of inventory: $75,400 + $80,200 + $82,000 + $95,000 + $92,000 + $72,000 + $68,000 7 = $564,600 , 7 = $80,657 Step 2: Divide gross margin by the average cost of inventory: GMROI = Gross Margin , Average Inventory at Cost = $365,945 , $80,657 = 4.54

Review of Cumulative and Maintained Markup Information that allows the calculation of cumulative and maintained markup is available from RIM records. As you learned in Chapter 5, cumulative markup is based on total merchandise handled and maintained markup is based on gross cost of merchandise sold. (You may want to review Chapter 5.) Refer back to Example 7-8. In this example, cumulative markup is 47.55%: Cumulative Markup $ = Retail of Total Merchandise Handled - Cost of Total Merchandise Handled = $140,450 - $73,668 = $66,782 Cumulative Markup % = Cumulative Markup $ , Retail of Total Merchandise Handled = $66,782 , $140,450 = 47.55% Also, cumulative markup percent can be calculated as the complement of the cost percent: (100% - 52.45% = 47.55%). Maintained markup is calculated using gross cost of merchandise sold: Maintained Markup $ = Net Sales - Gross Cost of Merchandise Sold = $73,840 - $42,695 = $31,145 Maintained Markup % = Maintained Markup $ , Net Sales = $31,145 , $73,840 = 42.18%

Practice Problems • Exercise 7.5 1. Determine GMROI if average inventory value at cost is $72,450 and gross margin is $245,400.

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2. Find GMROI, given net sales of $340,000, gross margin of 38%, and average inventory at cost of $60,000.

3. Calculate GMROI from the following data: net sales, $235,000; beginning inventory at cost, $44,000; closing inventory at cost, $46,000; and gross margin, 39%.

4. Calculate the GMROI for a six-month season (February–July) using the following data: Gross Margin

$342,000

Inventory at Cost: BOM stock February

$80,400

BOM stock March

$87,200

BOM stock April

$104,000

BOM stock May

$98,000

BOM stock June

$95,800

BOM stock July

$85,100

EOM stock July

$78,800

For Problems 5–8, refer back to Exercise 7-4. 5. Using the information given in Problem 1, calculate (a) cumulative markup percent and (b) maintained markup percent.

6. Using the information given in Problem 2, calculate (a) cumulative markup percent and (b) maintained markup percent.

7. Using the information given in Problem 3, calculate (a) cumulative markup percent and (b) maintained markup percent.

8. Using the information given in Problem 4, calculate (a) maintained markup percent and (b) gross margin percent if net markdowns are reduced to $180,000. (Disregard using the physical inventory given in the problem).

Inventory Valuation

197

Definitions Definitions

Book Inventory – Value of the inventory that should be on hand as shown by the accounting records.

the records on a frequent basis (perhaps daily), providing a book inventory value.

Estimated Physical Inventory – Value of inventory that is determined by subtracting estimated shortage from book inventory.

Physical Inventory – Value of inventory determined by actually counting the merchandise.

Estimated Shortage – The amount of shortage that probably has occurred on the basis of past experience.

Retail Method of Inventory (RIM) – A procedure whereby the approximate cost value of the ending inventory and, consequently, the cost value of merchandise sold, is determined from the retail value of the closing inventory.

Gross Margin Return on Inventory (GMROI) – A measure of inventory profitability that relates a store’s gross margin to the cost of the inventory needed to generate the profit. Overage – Difference between book inventory and physical inventory when book inventory is smaller. Perpetual Inventory System – A system of accounting whereby all transactions affecting the value of the inventory are posted to

Returns to Vendor (RTV) – Merchandise returned to the vendor, usually requiring the vendor’s permission. Shortage or Shrinkage – Difference between physical inventory and book inventory when book inventory is larger.

Summary Problems Chapter 7 • Summary Problems

1. Net sales for the hosiery department in May were $30,620. Book inventory at the end of the month showed that $97,831 should be on hand. Physical inventory showed $97,560. Determine shortage or overage percent (specify which).

2. Using the following figures, determine closing book inventory (not all information given may be needed): Opening inventory

$89,760

Gross purchases

$43,620

RTV

$860

Cash discounts

$320

Markdowns

$318

Employee discounts

$784

Gross sales Customer returns Net markups

198

$5,246

Markdown cancellations

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$49,318 $2,945 $760

3. Calculate shortage or overage percent, given the following information: Opening inventory RTV Gross purchases Customer returns

$64,280 $960 $123,645 $9,780

Gross sales

$105,420

Transfers in

$12,219

Transfers out

$9,769

Markdowns

$15,290

Markdown cancellations

$940

Employee discounts

$670

Closing physical inventory

$77,700

4. Given the following information, calculate the estimated physical inventory if shortage is estimated to have been 0.88%: Net sales Closing book inventory

$380,670 $64,388

5. Determine (a) cumulative markup percent, (b) gross cost of merchandise sold, and (c) maintained markup percent, given the following information: Given: Cost ($)

Retail ($)

Opening inventory

37,840

69,320

Net purchases

16,460

33,730

Freight

910

Net transfers in

230

Gross sales

560 38,140

Customer returns

2,080

Net markdowns

4,060

Employee discounts

930

Inventory Valuation

199

6. Calculate (a) shortage percentage, (b) gross cost of merchandise sold, (c) maintained markup percent, and (d) gross margin percent, given the following information: Cost ($)

Retail ($)

Opening inventory

130,410

201,543

Gross purchases

418,390

884,916

Returns to vendors

1,726

3,514

Cash discounts

2,040

Alteration costs

1,620

Freight

1,690

Gross sales

806,430

Customer returns

60,340

Markdowns

120,630

Markdown cancellations

3,048

Additional markup

360

Employee discounts

1,010

Closing physical inventory

212,803

7. Calculate (a) maintained markup percent and (b) gross margin percent, given the following information: %

Cost ($)

Retail ($)

Opening inventory

68,200

119,740

Gross purchases

39,200

80,520

Freight

1,460

Additional markup

430

RTV

2,010

Cash discounts

1,670

Alteration/workroom costs

510

Gross sales

106,540

Transfers in

340

720

Transfers out

510

1,020

Customer returns

8,620

Markdowns

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12,960

Markdown cancellations

430

Employee discounts

980

Estimated shortage

200

4,160

0.92

8. Using the numbers from the previous problem, calculate GMROI. Use an average inventory based on opening and estimated physical closing values.

9. Calculate GMROI from the following data: net sales, $550,110; average inventory at cost, $66,180; and gross margin, 38%.

10. Calculate GMROI for a year using the following information: Gross Margin

$81,840

Inventory at Cost: BOM stock February

$19,200

BOM stock March

$20,100

BOM stock April

$22,500

BOM stock May

$24,800

BOM stock June

$22,400

BOM stock July

$19,000

BOM stock August

$21,400

BOM stock September

$22,500

BOM stock October

$25,200

BOM stock November

$26,100

BOM stock December

$23,200

BOM stock January

$20,000

EOM stock January

$19,600

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Case Study 1 Department Productivity Related to Increasing Inventory Levels Jeanne Heitmeyer, Ph.D. The Florida State University Angela Jones is the store manager for a large department store in the Southeastern United States. Two of her department managers have requested additional square footage for their departments. Angela is analyzing each department’s performance to determine which department is more profitable for the store, and therefore, which will be considered for additional space. She is analyzing department figures more in-

Women’s Sportswear Net Sales

Women’s Suits $345,000 $225,000

Opening inventory

$195,000

$525,000

Gross purchases

$475,000

$24,000 $3,000

Markdowns

Vendor returns Employee discounts

$19,000 $2,500

$75,000

Markdowns

Cash discounts

$10,000

Cash discounts

Closing physical inventory

$285,000

Closing physical inventory

$315,000

Operating expenses

$127,000

Operating expenses

$155,000

Markup percent

49%

No Alterations

DISCUSSION QUESTIONS FOR CASE STUDY 1:

1. Calculate the closing book inventory at retail and cost for each department.

2. Calculate the shortage percentage for each department. 3. Calculate the gross margin percentage and GMROI for each department.

4. Calculate the operating expense and profit percentages for

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$290,000

Gross purchases

Employee discounts

202

Net Sales

Opening inventory

Vendor returns

each department.

depth than merely the formula for sales per square foot, as her store needs to increase its level of profitability due to a recent downturn in the economy. Consumer confidence needs to be boosted and she hopes to achieve this by stocking more of the merchandise that female customers desire from her store. The two departments, women’s sportswear and women’s suits, had the following figures for the past fall season:

Markup percent Alterations

$36,000 $13,500

62% $5,000

5. Compare the two departments on shortage and gross margin percentage, GMROI, and operating expense and profit percentages. Please help Angela with her decision and recommend which department presents the best case for an increase in square footage and inventory, based upon the overall profitability of the department store. Discuss reasons for your recommendation and how it will boost consumer confidence and increase sales leading to a higher level of profitability for this large department store in the Southeastern United States.

Case Study 2 Does the Accuracy of Physical Inventory Affect Profit Estimates? Ann Paulins, Ph.D. Ohio University Physical inventory is taken every six months, in January and July, at the Global Enterprises Specialty Fashions store. Employees work a Sunday-evening-to-early-Monday-morning shift, while the store is closed, to perform this task the first weekend of the designated month. Merchandise is counted and recorded at the current retail price, and the physical inventory level obtained is compared with book inventory to determine shortage. The Global Enterprises Specialty Fashions has shown shortage as follows the past three years: Last year (%)

Two years past (%)

Three years past (%)

January

4.75

4.40

4.24

July

2.10

2.30

2.20

The inventory selection in the Global Enterprises Specialty Fashions is highly seasonal, and monthly sales tend to follow a typical retail distribution, with December sales averaging about 18% of annual net sales. When physical inventory is counted in January, much of the missing merchandise is allocated to Christmas promotional items and the theft and damages that occur as a result of heavier store traffic. In July, shortage tends to span a wider variety of merchandise but also tends to be less than that during the holiday shopping season. John, the store manager, analyzes sales and profit levels monthly. He uses an inventory valuation formula to determine total cost of merchandise sold (TCMS) and then applies the TCMS figure to his monthly skeletal statement to determine the operating profit for Global Enterprises Specialty Fashions. Currently, John is analyzing figures for the month of April; net sales for April were $525,600.00. Global Enterprises Specialty Fashions does not perform any alterations, nor does it take advantage of any cash discounts in its purchasing program. After two years on the job as Global Enterprises Specialty Fashions’ manager, John is concerned that he could improve (decrease) shortage levels if he is able to

carefully analyze the store’s historic inventory and shortage levels and also assess current practices of managing inventory and preventing shortage. Consider the information that John has, and the way that figures are used in the inventory valuation formula to respond to the case study discussion questions. DISCUSSION QUESTIONS FOR CASE STUDY 2:

1. Compute average shortage percent for the past three years for (a) January (b) July

2. Why do you think that there is a difference in shortage percents between the two measurement periods? Do you think that the difference between the average shortage in July and the average shortage in January is significant? Explain your response.

3. What figure would you expect that John would identify as the estimated shortage figure for July this year? Is it the same figure that you would expect him to use to estimate shortage for April? Why or why not?

4. Using the following figures and net sales for April, determine the expected profit or loss for Global Enterprises Specialty Fashions in April if you do NOT include an estimated shortage in your calculation. April Figures:

Total Merchandise Handled

$ Cost

$ Retail

416,700

947,530

Total Reductions

539,600

Expenses

220,752

5. Calculate anticipated profit for April when shortage is estimated to have been 2.20%.

6. How would you suggest that shortage be estimated during the months when no physical inventory is taken?

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203

7. What are your recommendations regarding the frequency

frequent physical inventory counts? Provide a justification for your recommendation.

with which physical inventory is taken at Global Enterprises Specialty Fashions? Should it be taken more frequently or less frequently? Should there be no change in the frequency with which physical inventory is taken? What are the advantages and consequences associated with more

8. What other recommendation do you have for John with respect to store operational procedures that could reduce shortage? And, what are the relative advantages and disadvantages of implementing your suggestions?

Case Study 3 Analyzing Performance with Retail Method of Inventory Raymond Wimer, Ph.D. Syracuse University Quinn Coleman is the buyer for men’s activewear for EB’s department store chain in the northeast United States. Quinn just received his spring season inventory figures, operational figures for his department, and the key operating results for the entire

men’s sportswear division. Quinn needs to prepare to meet his DMM on Monday morning. He needs to be able to explain his department’s performance and areas of weakness and strength. Quinn received the following data for his department:

Cost $

Retail $

Opening inventory

256,500

570,920

Gross purchases

200,000

380,000

Freight

1,008

Additional markup RTV

12,270 3,200

Gross sales

665,000

Transfers in

1,800

3,800

Transfers out

1,200

2,400

Customer returns

15,000

Markdowns

46,500

Markdown cancellations

6,500

Employee discounts

10,000

Physical inventory

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6,500

Cash discounts

Operating expenses

204

800

292,500 227,500

The key operating results for the entire men’s sportswear division are listed below:

2. Calculate the gross margin percent for this department. 3. Calculate the profit or loss percent for this department.

Factor

Result

4. Calculate the GMROI for the active wear department.

Gross margin

46.5%

5. Compare your findings with the key operating results for the

Profit

2.0%

Shortage

1.85%

Operating expense

44.5%

GMROI

2.53

men’s sportswear division. Discuss which results are a strength for Quinn’s department. Which results are weaknesses for Quinn? How would you address these weaknesses for the coming season?

DISCUSSION QUESTIONS FOR CASE STUDY 3:

1. Calculate the shortage or overage percent for the activewear department.

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205

THE DOLLAR MERCHANDISE PLAN OBJECTIVES • To complete the steps involved in planning sales, stocks, markdowns, and purchases leading to the finalized merchandise plan. • To understand the use of sales curves in planning sales. • To determine the average inventory and stock turnover rate. • To calculate beginning-of-the-month (BOM) stock according to the weeks’ supply method, the basic stock method, the stock–sales ratio method. KEY POINTS • The two major tools of merchandise planning are the dollar merchandise plan and the open-to-buy. • The dollar merchandise plan serves as a guide for achieving desired sales and profit goals and provides a means for comparing and evaluating merchandising results. • Merchandise planning begins with sales planning. It is important that the planned sales figure be as realistic as possible, because this figure is the basis upon which all other figures are planned. • A sales curve shows the relative importance of sales from one month to another by illustrating the peaks and valleys in customer demand for a particular item or category of merchandise. The sales curve assists the buyer in knowing how many of an item to buy and when to buy them. • Stock turnover, gross margin, and gross margin return on investment serve as guides in determining the efficiency of money invested in a retailer’s inventory. • Methods used to calculate the inventory needed to achieve planned sales include (1) the weeks’ supply method, (2) the basic stock method, and (3) the stock–sales ratio.

8 207

Career Corner Planning Analyst Samantha A. Dornan Michaels Stores, Inc. Description of Job Responsibilities The Planning Analyst position that I hold involves ensuring that corporate inventory initiatives are included in departmental strategies. In my job I continually analyze trends and provide recommendations to optimize sales, margin, and inventory. I also utilize my analytical skills to optimize seasonal plans. Using Michaels’ financial planning, weekly sales, and margin, inventory plans are created at a subclass level for seasonal and trend programs. I work with pricing and consult with the category Samantha Dornan / Michaels Stores directory or manager to make appropriate season markdown recommendations for seasonal and trend products. My job also includes evaluating forward buys on market deals and other opportunities. I ensure assortments are completed within specific time frames and participate in assortment plan review with the category directory for seasonal historical information. Relevance of Merchandising Mathematics With any position in retail, merchandise mathematics is not just a tool, but an “everyday, can’t live without” skill. In my

current position as planner, my foundation of merchandise mathematics is a key component to every decision I make. For example, changing a promotion can hurt my margin, but increase my sell-through. Recognizing the potential effect a decision may have on results is especially important when making major decisions. Without that foundation of knowledge, it could be a struggle to understand your business. You have to be able to understand how a business performs and what you can do to make it perform better. That’s what makes a great merchant. Career Path Following my graduation with a Bachelor of Science degree from Texas State University–San Marcos, I was hired by Zale Corporation into their Merchandising Training Program as an Assistant Buyer in the Wedding Department. Approximately two years later, I was promoted to Merchandising Planner in the Watches Department. After being with Zales for three years, I chose to take a position with Michaels Stores in the corporate office as a Merchandise Analyst in the Floral Stems Department. One year later, I was promoted to my current position as a Planner Analyst in the Home Décor and Containers Department. Advice for Students Interested in Merchandising Careers Be passionate about it!!! A career in retail is fast paced. Retailing is an ever-changing environment with some long days. You need to enjoy it!!!

One of the most difficult tasks facing the retail merchandiser is determining what to carry. Careful planning is necessary if the retailer is to carry the “right” stock in the “right” quantities. Thus, planning is of great importance in merchandising goods to achieve a profit. To a great extent, the success or failure of the merchandising division is dependent on the degree and quality of the planning that takes place. Merchandise planning involves establishing realistic goals to be achieved. Planning serves the following purposes: 1. Goals represent the objectives toward which the retailer is striving. 2. Plans provide the map to be followed in reaching the established goals. 3. Plans are a means by which effectiveness can be measured and permit a detailed analysis that should lead to improved results.

Tools of Merchandise Planning The two major tools of merchandise planning are the dollar merchandise plan and the open-to-buy. The merchandise plan projects to the future, serving as a guide for the selling period that has not yet begun. The plan is reviewed and adjusted as the selling period progresses. The open-to-buy (OTB) covers a shorter term and is a control device used to see that purchasing is done according to the merchandise plan. The Dollar Merchandise Plan is the dollar control budget for the retail firm. It projects the amount, in dollars, of merchandise needed to achieve planned sales. This plan balances stocks and sales by coordinating sales, stocks, purchases, and markdowns with initial markup, gross margin, and stock turnover goals. Some retailers also include stock shortages, cash discounts, operating expenses, sales promotion expenses, and net profit in their merchandise plans. 208

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The open-to-buy is the amount of merchandise that a retailer may order during the balance of a period. It is the amount of money remaining to be spent from an existing budget after some purchases have been made. OTB can be expressed in dollars and in units. The calculation of OTB is explained in Chapter 9.

The Merchandise Plan The detail involved in the merchandise plan varies with the retail firm’s size and number of departments. Even in the smallest operation, some planning is important in order to spend the firm’s capital wisely. Proper planning for any size of organization should lead to improved profit. In a large retail organization, a detailed merchandise plan is essential because of the involvement of many departments and numerous personnel. In a large organization, top management develops long-range and shortterm organizational goals. They, in turn, determine the profit requirements of the organization on the basis of projected sales volume, gross margin, and operating expenses. The overall plan for the retail firm is then distributed to the various merchandise divisions, where detailed plans are formulated. The general merchandise manager (GMM) is responsible for translating top management’s overall merchandise plan into detailed plans for each division and each store or retail format. The divisional merchandise manager (DMM) works with the buyers in his or her division to develop detailed divisional plans. Divisional plans are then consolidated and reviewed by the general merchandise manager before being finalized and approved by top management. Although the period covered by a merchandise plan may vary from one month to one year, merchandise plans are normally made for a six-month period. Thus, two merchandise plans are compiled for the year, one for the spring season (February through July) and a second for fall (August through January). The six-month seasonal plan is subdivided into quarterly, monthly, or even weekly plans. Development of the six-month plan begins several months in advance of the beginning date of the plan. Buyers and divisional merchandise managers usually play an active part in the development of these merchandise plans.

Format for the Merchandise Plan The form used for the merchandise plan varies from company to company; however, all plans have certain common characteristics. Figure 8-1 is a typical form for a merchandise plan. Less formal and detailed plans may be used by small retail organizations, while large-volume organizations may use a plan with more detail. The essential elements of a merchandise plan include sales, stocks, markdowns/reductions, markup, and purchases. A plan may also include stock turnover, cash discounts, alteration costs, selling costs, sales promotion expenses, and gross margin. Forms for the merchandise plan usually provide room for planned figures, last year’s figures, and actual figures for the plan period. Last year’s (LY) figures provide a guide in determining this year’s (PL) figures. The dollar merchandise plan is similar to a personal budget. It shows income expected and expenditures anticipated for the period of plan. The merchant constantly checks the actual results against the plan and makes adjustments as the season progresses. Figures for the plan are based on the organizational goals as well as the following sources: 1. Retail sales figures, including last year’s figures and the trend over several years. 2. The changing picture of competition. 3. Trade statistics. 4. Economic forecasts from various sources, including banks, government agencies, business schools, and trade associations. In planning, emphasis should be placed on last year’s operation, including merchandise carried, changes in the retail format, including physical store modifications, and store policies regarding buying, selling, and promotion. When the planned sales are consolidated, they are compared with the overall plan to see if the figures The Dollar Merchandise Plan

209

SIX-MONTH MERCHANDISING PLAN

Department Name Department Number Merchandise Manager Buyer Period

SALES

EOM STOCK

MARKDOWNS

BOM STOCK

PLANNED PURCHASES AT RETAIL PLANNED PURCHASES AT COST

Last Year

Plan

Actual

June December

July January

SEASON TOTALS

% initial markup % markdowns % alteration expense % cash discount % gross margin % operating expense % net profit season turnover average stock GMROI

SPRING FALL LY Sales PL Sales Revised Actual % Change % of LY Sales % of Plan Sales LY EOM Stock PL EOM Stock Revised A ctual LY Markdowns PL Markdowns Revised Actual % Change % of LY Reductions % of PL Reductions LY BOM Stock PL BOM Stock Revised Actual LY Stock/Sales Ratio PL Stock/Sales Ratio LY Purchases @ Retail PL Purchases @ Retail Revised A ctual LY Purchases @ Cost PL Purchases @ Cost Revised A ctual

AUTHOR I Z AT I O N SI G N A T U R E S :

February August

March September

April October

May November

AUTHORIZATION DATE:

Buyer Merchandise Manager Controller FIGURE 8-1 Form for six-month Merchandise Plan. appear too high or too low. Planning sales on the basis of last year’s sales trends saves time and confusion. Obviously, revisions will be necessary as the plan period progresses, in order to keep departments from becoming overbought or to permit more open-to-buy to meet increasing sales demand. It is important to realize that the planned figures become the objective toward which the retail management and department personnel aim. These planned figures should always represent goals that are reasonably attainable. 210

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Planning Sales Actual planning begins with sales. The planned sales figure should be as accurate and realistic as possible, because this figure is the basis on which all other figures are planned. Sales are planned on a net basis (gross sales minus customer returns). Realistic sales planning is critical because sales are the key to profit. Many factors influence sales. Some of these factors can be controlled by the retailer and some cannot. As planning is carried out, the retailer must take into account the major influences on sales. The retailer must be aware of factors affecting the customer’s ability and motivation to buy. Shifts in customer demand occur for a variety of reasons. In addition, sales are influenced by such external factors as employment conditions, the state of the economy, inflation, population trends, and the changing competitive situation. Fashion is another external force that greatly influences sales. For example, when the accepted fashion for women is pants, the dress business suffers while sportswear flourishes. When planning sales, retailers must also be aware of the shift in the calendar from one year to the next. For instance, in some years Easter falls in March and in other years it falls in April. The start date for schools may vary from one year to another as well as from one community to another, influencing sales for “back-to-school” merchandise. Changes in the supply of goods and new products on the market also require attention when planning sales. For example, constant changes in electronic media necessitate continual monitoring of product assortment, phasing in certain lines while phasing out others. Certain factors within the organization also influence sales. However, the retailer has considerable control over these internal factors. The addition of new stores or formats or physical changes within an existing store or format influences sales. Adjustments in marketing strategies also affect sales. Changes in store policies, such as an increased emphasis on sales promotion or a stronger emphasis on carrying designer fashions, may serve to stimulate or retard sales in certain departments. The successful merchant learns to study and evaluate all factors that may influence sales. These factors must be carefully considered in developing the merchandise plan. It should always be remembered that plans must be based on facts in order to be realistic. To ensure that all relevant external and internal factors are examined, it is important to have strong communication between the buying office and store management. In order to understand how to make a six-month merchandise plan, we begin by determining the sales goal for the department, store, or other retail format. Remember, (1) all planning begins with sales, and (2) plans must be realistic. Begin by analyzing all sales figures, using the following steps: 1. Obtain sales from last year for each month of the plan. 2. Determine projected sales volume for each month in the plan. Note: Remember to consider factors that influence sales, including changes in promotional dates, competition, department size, and layout. Review past sales history and current trends. 3. Figure percent increase or decrease of planned sales over the last year’s sales. To determine percent increase or decrease in sales, divide the difference between this year’s planned (PL) sales and last year’s (LY) actual sales by last year’s actual sales. % Sales Increase or Decrease ⴝ

PL This Year Sales ⴚ LY Actual Sales LY Actual Sales

Example 8-1 If the actual sales for last year were $270,000 and planned sales for this year are $300,000, what is the planned percent increase in sales for this year? Solution: % Sales Increase =

TY Sales - PL Sales PL Sales The Dollar Merchandise Plan

211

=

$300,000 - $270,000 $270,000

=

$30,000 $270,000

= 0.1111 = 11.11% increase A retailer does not always plan for an increase in sales. A decision may be made to reduce the volume of a department or classification because of reduced demand.

Example 8-2 GIVEN:

Current year planned sales

$250,000

Previous year’s actual sales

$270,000

Solution: % Sales Decrease =

LY Sales - PL Sales LY Sales

=

$250,000 - $270,000 $270,000

=

- $20,000 $270,000

= - 0.07407 = 7.41% decrease Although there is no formula for planning sales, knowing the percentage of increase or decrease in sales during a several-month period provides one type of information that is crucial in projecting sales. The merchandiser evaluates all the information available to make decisions that will serve as the basis for the departments’, stores’, or other formats’ future operation.

Example 8-3 Given the following figures, plan the sales for the month of November. Last Year Sales ($)

Planned Sales ($)

Increase (%)

July

268,000

288,100

7.50

August

292,500

316,193

8.00

September

286,749

314,196

9.50

October

281,119

306,376

8.98

November

324,500

—

—

Month

Solution: The percent of sales increase has varied from 7.5% to 9.5%. For November, the merchandiser would plan a sales increase between 8.5% and 9.0%. Planned Sales for November = $324,500 + ($324,500 * 8.5%) = $352,083 = $324,500 + ($324,500 * 9.0%) = $353,705 Note: November sales should be planned to be somewhere between $352,083 and $353,705. Other factors would need to be taken into consideration before a final decision is made. In some instances, the season’s total sales are planned and then sales are allocated to individual months, 212

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depending upon the percent of the season’s sales expected for each individual month. If the season’s (six months’)

total sales are planned to be $886,000 and it is estimated that 16% of the sales will occur in August, August’s planned sales will be $141,760.

Sales Curves Sales curves serve an important role in the process of distributing of sales among the months in a merchandising plan. A sales curve is a retailing tool used to express the variation in the rate of sale of a retail unit, an item, or a merchandise category over a certain period, usually six months or a year. A sales curve indicates the relative importance of sales from one month to another by showing the peaks and valleys in customer demand for a particular item or category of merchandise. Sales curves are used to maximize both sales and profit. They assist the buyer in performing the buying process by serving as a guide in determining how many units of an item to buy and when to buy it. Sales curves also assist those who allocate merchandise to retail units within a chain. For many types of merchandise, the curve remains relatively constant from one year to the next. For example, because of children going back to school, July is an important month for children’s apparel. A retailer may sell 1,250 pairs of jeans in July, but only 700 in June. Thus, the sales curve is higher in July than in June. A sales curve can be expressed in several ways: in units of sale, in dollars, as a percent, and as a ratio. 1. As a Unit of Sale: The number of units sold is recorded monthly, or sometimes weekly, for comparison. It can easily be seen which months have the highest sales. For example, the most candy is sold in October, prior to Halloween. The second highest candy sales occur before Easter. 2. As a Dollar Figure: The dollar amount of sales is recorded weekly or monthly for comparison. 3. As a Percent: Each month is expressed as a percent of the total for the six-month season or the year. Both units of sale and dollar sales may be expressed as a percent. 4. As a Ratio: In determining a ratio, the month with the lowest sales is used as the base month. For example, if February is the month with the lowest sales, it is given a 1, so the ratio is 1:1. If March sales represent three times as many sales as February, the ratio is 3:1. If sales in April are five times as high as February, the ratio is 5:1. An example of each of these types of sales curves follows.

Example 8-4 Unit Sales Curve Month

Units

August

Percent

60

6

September

180

18

October

260

26

November

220

22

December

160

16

January Total

120

12

1,000

100

Unit Sales Curve

30% 25% 20% 15% 10% 5% 0% August

September October

November December

January The Dollar Merchandise Plan

213

Example 8-5 Dollar Sales Curve Month

Dollars ($)

Percent (%)

August

1,300

13

September

2,200

22

October

2,400

24

November

2,000

20

December

1,100

11

January

1,000

10

10,000

100

Total

Dollar Sales Curve $3,000.00 $2,500.00 $2,000.00 $1,500.00 $1,000.00 $500.00

August

September October November December January

The information in Examples 8-4 and 8-5 can also be presented as ratios. To convert a sales curve to a ratio, use the month with the lowest percent as the base and divide the percent of sales for each month by this figure.

Example 8-6 Sales Curves as a Ratio Here is how the unit and dollar ratios in Examples 8-4 and 8-5 would look: August Units $

September

October

November

December

January

1:1

3:1

4.3:1

3.6:1

2.7:1

2:1

1.3:1

2.2:1

2.4:1

2:1

1.1:1

1:1

DETERMINING SALES CURVES To establish sales curves, the retailer must have accurate sales estimates. As previously noted, sales estimates are based on an accurate interpretation of sales records. A retail firm uses its own sales records from last year in each store or retail format to develop sales curves. In addition, national sales curve data are available that will provide a comparison. Most important, however, are the retailer’s own records. In establishing a sales curve, it must be recognized that the local climate, the types and ages of customers, their income levels, and many other factors make sales curves different from one store or retail format to the next. The buyer must ask many questions before making buying decisions. It is important to talk to retail managers and sales personnel to see what they have to say about their merchandise offerings and customer preferences. It is essential for the buyer to look at the presentation and advertising of merchandise to determine what effect each has had on the rate of sale. Was the merchandise attractively displayed in the stores, in the catalogs, or on the Web site, and was it advertised? The presentation and promotion of merchandise influence its rate of sale. Weather conditions and the fluctuations of the economy are also important influences on the rate of sale. 214

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Sales curves vary greatly, depending upon the geographical location of the customer. For example, swimwear will sell throughout the year in Miami, Florida, but in Michigan swimwear sales are generally limited to the spring/summer season. In Florida, women’s swimwear would be carried throughout the year, and sales would be somewhat consistent because of the weather and vacationing tourists. Data for the annual sales curve for women’s swimwear in Florida might look like this: February

5%

August

8%

March

9%

September

6%

April

9%

October

6%

May

14%

November

5%

June

12%

December

9%

July

9%

January

8%

In Michigan, the annual sales curve data for women’s swimwear is very different, and swimwear is rarely stocked during the winter months: February March

0%

August

10%

12%

September

0%

April

13%

October

0%

May

22%

November

0%

June

25%

December

0%

July

18%

January

0%

Swimwear Sales Comparison

30% 25%

Florida Michigan

20% 15% 10% 5%

Fe

br

ua r M y ar ch A pr il M ay Ju ne Ju A ly u Se gu st pt em O be ct r ob N er ov em D ec ber em Ja ber nu ar y

0%

Another example would be misses’ winter coats. In Louisiana, data for the six-month sales curve might look like this: August

5%

September

5%

October

20%

November

35%

December

25%

January

10%

By contrast, in New York, where it gets cold much earlier and stays cold much longer, the six-month sales curve data might be as follows: August

20%

September

20%

October

25% The Dollar Merchandise Plan

215

November

15%

December

10%

January

10%

Coat Sales Comparison 40%

Louisiana New York

35% 30% 25% 20% 15% 10% 5%

nu ar y Ja

em be r D ec

N ov e

m be r

ob er O ct

pt e Se

A ug us

t

m be r

0%

It is important to research past sales history and review sales curves in completing buying plans. If you missed sales because you were out of stock, you would have to estimate how much business you missed and add it to the actual sales in order to adjust your sales curve.

Example 8-7 Last year’s records show that your dollar sales for swimwear for the six-month period from February through July totaled $13,500. Monthly sales were as follows: February, $1,000; March, $2,000; April, $2,000; May $2,500; June $4,500; July $1,500. You ran out of stock on some sizes on April 5, and you did not receive replacement stock until the end of April. You estimated that you could have sold an additional 20 swimsuits in April at an average retail price of $35.00. Establish the actual percentage sales curve for the department, and adjust this sales curve to reflect true customer demand. By adding estimated sales that were lost because of being out of stock, a more accurate sales curve is obtained for the buyer to use in planning this year’s sales. LY Sales ($)

Lost Sales ($)

New Estimate ($)

New Curve (%)

February

1,000

—

1,000

March

2,000

—

2,000

14.1

April

2,000

700

2,700

19.0

May

2,500

—

2,500

17.6

June

4,500

—

4,500

31.7

July

1,500

—

1,500

10.6

Total

13,500

700

14,200

100.0

7.0

CATEGORY SALES CURVES It is also important to develop sales curves for specific divisions within a merchandise category. For example, the sales curves for women’s swimwear may differ by style. Specifically, one-piece swimsuits may sell at a different rate than two-piece suits or bikinis. Two-piece suits may reach their peak sales earlier in the season. One reason

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for this could be that most bikinis are purchased by younger women, who buy their swim suits earlier in the year than older women do. The buyer must apply judgment in adjusting sales curves. Fashion changes will influence what styles will sell best. The buyer must be aware of fashion forecasts and changing customer preferences. Some merchandise has a relatively flat sales curve. In other words, it sells at a relatively constant level throughout the year. Such merchandise is considered basic. Basic merchandise is defined as merchandise that is in continual demand and is kept in stock at all times. Basic merchandise has a highly predictable sales curve, with customer demand being stable over an extended period. Some examples are men’s underwear, women’s hosiery, cosmetics, and work clothes. It is easier to control this type of merchandise. Some basic merchandise has a relatively flat curve all year long, except for one or two peaks. For example, more men’s underwear is sold when children go back to school and at Christmas. It is important to know what percent of the annual sales volume these peaks represent so that additional merchandise can be purchased to meet the increased demand.

Calculating Sales By studying last year’s sales and sales curves, the buyer can more effectively plan sales. Last year’s sales for each month are totaled. The percent of sales for each month last year are calculated yielding a sales curve expressed in percentages. Applying the organizational goal expressed in an expected percent change in season sales, the dollar amount of the planned season sales is determined. Based on last year’s sales curve and adjusted for other internal and external factors, planned sales are then distributed among the months in the selling period.

Example 8-8 Last year’s sales for the fall season were as follows: August, $43,856; September, $47,023; October, $36,224; November, $49,216; December, $60,989; and January, $39,099. (a) What was the sales total for the season last year? (b) What was the percent of sales for each month last year? (c) If the goal is to gain a 1.3% increase in season sales next year, what are the planned season sales? (d) Using the sales curve from last year as a guide, distribute the planned sales among the months in the season. (e) What is the percentage change in sales for each month? Solution:

SALES

FALL

August

September

October

November

December

January

SEASON TOTALS

LY Sales

$43,856

$47,023

$36,224

$49,216

$60,989

$39,099

$276,407

PL Sales

$44,800

$47,600

$36,400

$50,400

$61,600

$39,200

$280,000

2.15%

1.23%

0.49%

2.41%

1.00%

0.26%

1.30%

% of LY Sales

15.87%

17.01%

13.11%

17.81%

22.06%

14.15%

% of PL Sales

16.00%

17.00%

13.00%

18.00%

22.00%

14.00%

Revised Actual % Change

(a) Last Year’s Season Total Sales ⴝ LY Sales for August ⴙ LY Sales for September ⴙ LY Sales for October ⴙ LY Sales for November ⴙ LY Sales for December ⴙ LY Sales for January = $43,856 + $47,023 + $36,224 + $49,216 + $60,989 + $39,099 = $276,407

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(b) Last Year’s Percent of Sales for the Month of August ⴝ Last Year’s Sales for the Month of August ⴜ Last Year’s Season Total Sales = $42,856 ÷ $276,407 = 15.87% (c) Planned Sales for the Season ⴝ (Percent Change in Sales ⴛ Last Year’s Season Total Sales) ⴙ Last Year’s Season Total Sales = (1.3% * $276,407) + $276,407 = $280,000 (d) Planned Sales for the Month of August ⴝ Percent of Planned Sales for the Month of August ⴛ Planned Season Total Sales = 16.00% * $280,000 = $43,800 (e) Percentage Change in Sales for the Month of August ⴝ (Planned Sales for August ⴚ Last Year’s Sales for August) ⴜ Last Year’s Sales for August = ($44,800 - 43,856) ÷ $43,856 = 2.15% Note: The distribution of monthly planned sales may vary based on internal and external factors and the judgment of the merchandise planner.

Practice Problems • Exercise 8.1 1. Planned sales for the month of August this year are $145,000. If the actual sales for the month last year were $130,000, what is this year’s planned percent increase in sales?

2. Actual sales in the stationery department last year totaled $518,000. If the department planned a 15% increase for this year, what is the dollar amount of sales planned?

3. Due to a reduction in the number of stores with a formalwear department, the buyer is planning a 20% reduction in sales for the department. If last year’s sales were $218,000, what is this year’s planned sales figure?

4. This year’s sales totaled $90,000 for August and $96,000 for September. If the planned seasonal sales distribution is as follows, figure the dollar sales for the remaining months of the period: August

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15%

September

16%

October

14%

November

19%

December

24%

January

12%

5. Figure the percent increase in sales for each of the following months, and determine the probable sales for June in a department that had the following sales pattern:

Month

LY Sales ($)

PL Sales ($)

March

140,000

155,000

April

155,000

170,000

May

145,000

160,000

June

152,000

?

6. Plan sales for the months of August through January, given the following information: Month

LY Sales ($)

PL Sales ($)

February

64,819

70,632

March

97,236

106,340

April

118,876

130,090

May

97,284

106,726

June

86,398

94,692

July

75,613

83,174

August

90,116

—

September

96,261

—

October

83,968

—

November

119,407

—

December

144,154

—

January

71,993

7. Determine the sales curve percents by month on the basis of the following unit sales curve data for one misses’ swimwear style: February, 10 units; March, 22 units; April, 32 units; May, 48 units; June, 66 units; and July, 22 units.

8. You are planning the sales of the same style of swimsuit as that in problem 7 for the coming plan period. You estimate that this year you will sell 260 of the suits. On the basis of the percentage sales curve you found in problem 7, calculate planned unit sales by month so that purchases can be made for this year.

Planning Stocks After estimating sales, the next step in merchandise planning is to plan stocks. Stocks represent capital investments, and retailers are vitally interested in return on capital investment. Too much inventory at any one time can seriously inhibit the investment return for an entire season. Too much inventory causes an The Dollar Merchandise Plan

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overbought condition with a resulting lack of new merchandise. Excessive merchandise results in increased markdowns. The buyer determines the amount of stock needed at the BOM in order to meet planned sales figures. The student should remember that the end-of-month (EOM) stock for one month is the same as the BOM stock for the following month. In other words, the EOM stock for February would be the same as the BOM stock for March. Retailers use a variety of methods to plan stocks in order to provide for a balanced inventory in relation to estimated sales. These methods include (1) the weeks’ supply method, (2) the basic stock method, and (3) the stock–sales ratio method.

Stock Turnover Turnover is an important tool in evaluating the efficient use of capital invested in inventory (stock). Stock turnover (also referred to as stock turn or inventory turn) serves as a guide to the merchant in determining the efficiency of a firm’s operation. Often used to evaluate planned stock, stock turnover may be figured on the basis of retail, cost, or units of merchandise. As we have already seen, most retailers keep their records at retail; therefore, figuring stock turnover at retail is the most common method. Unit stock turnover is appropriate with certain types of large or expensive merchandise, such as major appliances, furniture, diamonds, and automobiles. Stock turnover, which is also referred to as stock turn rate, is defined as the number of times the average stock is sold during a given period of time in relation to the sales for the same period. To determine stock turnover at retail, both sales and stock figures must be expressed as retail values. Stock Turnover ⴝ Net Sales at Retail ⴜ Average Stock at Retail Most commonly, stock turnover is figured on the basis of a year or six months; however, it may be determined for a week, a month, three months, or, indeed, any period.

FIGURING STOCK TURNOVER AT RETAIL In order to determine stock turnover at retail, you must first calculate average stock. The amount of stock in a department varies from time to time. The objective is to determine an average that reflects the ups and downs of the inventory. Average stock for any period is the stock at the beginning of that period, plus the stock at the beginning of similar periods, plus the stock at the end of the period, divided by the total number of stock listings. Average Stock ⴝ

BOM Stock for Each Month in the Period ⴙ EOM Stock for Last Month Number of Months in the Period ⴙ 1

For example, 1@month average stock =

BOM Stock + EOM Stock 2

6@month average stock =

BOM Stock for Each Month + End@of@Period Stock 7

1@year average stock

=

BOM for Each Month + Last Month>s EOM 13

Some retailers report inventory figures weekly. In such cases, average stock may be determined on the basis of weekly stock. For a year’s time, this results in 53 figures. Although stock turnover can be calculated with EOM figures, this is not typically done by most retailers. 220

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Example 8-9 Figure the stock turnover at retail for a period of one month, given the following information: $32,000 BOM stock at retail, $38,000 EOM stock at retail, and $14,000 net sales for the month. Solution: (a) Average Stock =

BOM Stock + EOM Stock 2

=

$32,000 + $38,000 2

=

$70,000 2

= $35,000 (b) Stock Turnover = Net Sales , Average Stock = $14,000 , $35,000 = 0.4 for the month

Example 8-10 Figure the stock turnover at retail for the six-month period from February through July. Given: Net sales for six-month period were $88,000. Month

BOM Stock ($)

February

39,000

March

38,000

April

35,000

May

35,000

June

34,000

July

26,000

August

33,000

Note: The BOM stock for a month is the EOM stock from the previous month. Therefore, the EOM stock for July (the last month in the six-month period) is $33,000, which is the BOM stock for August.

Solution: (a) Average Stock =

BOM Stock for Each Month + End@of@Period Stock 7

$39,000 + $38,000 + $35,000 + $35,000 + $34,000 + $26,000 + $33,000 = 7 =

$240,000 7

= $34,286 (b) Stock Turnover = Net Sales , Average Stock = $88,000 , $34,286 = 2.57 If stock turnover equals net sales divided by average stock, then average stock equals net sales divided by stock turnover. This equation is particularly useful for planning stock levels. Average Stock ⴝ Net Sales ⴜ Stock Turnover The Dollar Merchandise Plan

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Example 8-11 Figure average stock when net sales are $55,000 and the stock turnover is 3.5. Solution: Average Stock = Net Sales , Stock Turnover = $55,000 , 3.5 = $15,714

Practice Problems • Exercise 8.2 1. A store had a BOM stock of $300,000 at retail. Net sales for the month were $146,000. The EOM inventory was $350,000. What was the stock turnover for the month?

2. Junior dresses had an opening inventory of $36,000 at retail. Net sales for the period were $12,389. If the closing inventory was $37,000, what was the rate of stock turnover for the period?

3. Determine the average stock in a department with annual sales of $1,650,000 and an annual stock turnover of 4.5.

4. What is the six-month stock turnover based on the following figures and net sales of $450,000? Month

BOM Stock ($)

February

60,000

March

63,000

April

75,000

May

72,000

June

68,000

July

65,000

August

75,000

5. Find the turnover for the six-month spring–summer season (February to July) from the following data: Month

Sales ($)

BOM Stock ($)

February

10,000

21,000

March

18,000

18,000

April

16,000

25,000

May

12,000

26,000

June

14,000

29,000

July

10,000

24,000

6,000

18,800

August

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(Continued) Month

Sales ($)

BOM Stock ($)

September

12,000

26,000

October

11,000

25,000

November

14,000

29,500

December

19,000

35,000

January

13,000

24,000

6. Using the data in the previous problem, calculate turnover for the following periods: (a) four-month period, February–May (b) three-month period, October–December (c) the month of June

FIGURING STOCK TURNOVER AT COST Stock turnover may be figured on the basis of cost, but this is practical only when records are kept at cost. To figure stock turnover at cost, both stock and sales figures must be cost values. The cost method of figuring stock turnover is seldom used because most retailers keep their merchandise records at retail.

FIGURING STOCK TURNOVER BY UNITS Stock turnover may also be figured by units rather than by dollars. With categories of merchandise consisting of many small items, unit stock turnover is impractical. With large or high-priced items, however, such as major appliances, fine jewelry, or furniture, unit stock turnover becomes practical.

Example 8-12 Calculate unit turnover for the month, given the following information: BOM stock of 100 units EOM stock of 75 units Units sold during the month: 200 units Solution: (a) Average Stock =

BOM Units + EOM Units 2

=

100 + 75 2

=

175 2

= 87.5 (b) Stock Turnover = Net Sales in Units , Average Stock in Units = 200 , 87.5 = 2.2857 per month Note: Remember that stock turnover is based on the average amount of stock on hand in relation to sales for that same period. The Dollar Merchandise Plan

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SIGNIFICANCE OF STOCK TURNOVER Money, if put to work properly, will make money. In order to make money “work,” it must be used over and over again within a relatively short time. In merchandising, this means buying merchandise, selling it at a profit with reasonable promptness, and reinvesting the money in more stock, the same cycle continuing. Turnover measures this very factor of stock purchase, sale, and repurchase. A good turnover rate depends on the type of merchandise and the period involved. Turnover may range from a low of less than two for some merchandise up to 20 or more turns for other merchandise. There is a wide variation in stock turnover, depending on the kind of merchandise a store or department carries. (See Table 8-1 for stock turnovers for various departments in department stores.) To some extent, stock turnovers vary with the frequency of purchase by customers. Frequently purchased items, such as gasoline or perishable food items, have a high stock turnover. Less frequently purchased items, like furniture or fine jewelry, have a much lower stock turnover. The turnover is also reduced for items that must be carried in a wide assortment of styles, colors, sizes, or other selection factors. The buyer can influence the stock turnover by the way merchandise is purchased. Buying in small amounts and replenishing the stock frequently will result in a higher stock turnover. Selling from sample stock, which is sometimes done with furniture sales and bridal gowns, will also increase the stock turnover. If a store or department is close to being overbought, the buyer may need to make purchases more frequently, thus increasing stock turnover. A rapid rate of turnover has several advantages. By limiting its investment in merchandise, a retailer reduces expenses such as interest, taxes, storage for merchandise, and insurance on merchandise. A retailer may achieve larger sales with a smaller stock that is fresh and more appealing to the customer. Fewer markdowns will occur because of old or soiled merchandise, and return on investment may rise. Stock turnover, however, can be too high. Too rapid a turnover rate may lead to lost sales. Smaller and more frequent orders may increase transportation costs and expenses related to handling merchandise and keeping records. Quantity discounts may be lost because of buying in small quantities. The primary disadvantage with too high a stock turnover is that sales may be lost from goods the customer wants to buy that are out of stock because the buyer is purchasing in small quantities. There is a need to strike a profitable stock turnover rate.

Weeks’ Supply Method One of the methods retailers may use to plan stock levels is the weeks’ supply method. Weeks’ supply is defined as a method of planning stock whereby the needed inventory is equal to the sales for a specific number of weeks. The weeks’ supply method plans stocks on a weekly basis by setting stocks equal to a

TABLE 8-1 Stock Turnovers for a Department Store Type of Merchandise

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Annual Stock Turnover

Food, candy, and beverages

3.8

Junior dresses

3.2

Misses’ sportswear

2.8

Handbags

2.0

Men’s and boys’ sportswear

2.4

Costume jewelry

1.7

Men’s and boys’ clothing

1.3

China and glassware

1.1

Children’s footwear

1.2

Silverware

1.2

predetermined number of weeks’ sales. Weeks’ supply is calculated by taking the number of weeks in the period and dividing it by desired stock turnover rate for the period. Weeks> Supply ⴝ Number of Weeks in the Period ⴜ Stock Turnover for Period The weeks’ supply method is applicable to merchandise such as groceries and men’s dress shirts that do not fluctuate much in sales volume from week to week. Stores or departments that use this method of stock planning, plan sales by weeks rather than on a monthly basis. With the weeks’ supply method of stock planning, the number of weeks’ supply that is to be kept on hand during a period is dependent on the rate of stock turnover required for the store or department.

Example 8-13 If net sales for the spring season are planned at $280,280 and a stock turnover of 5 times during the season is desired, how many weeks’ supply should be on hand at all times? Solution: Weeks> Supply = 26 Weeks , Desired Stock Turnover = 26 Weeks , 5 = 5.2 Weeks supply needed on hand every week Average Weekly Sales = Planned Sales for the Period , Number of Weeks in the Period = $280,280 , 26 weeks = $10,780 In the preceding example, management must decide whether weeks’ supply is to be calculated as exactly 5.2 weeks or 5 weeks, for simplicity. The use of computers allows easy calculation of 5.2 weeks’ supply once weekly sales have been planned. Table 8-2 shows planned inventory levels based on 5.2 weeks’ supply.

Basic Stock Method The basic stock method for planning inventory levels is based on a stock turnover goal. The basic stock method of stock planning requires that the BOM stock be sufficient to cover the sales for that month and allow for a reserve of basic stock. Basic stock is defined as the minimum stock that should be maintained at all times. Basic stock is a reserve that provides some assortment from which customers may select merchandise and that protects the department against stock contingencies. The basic stock method is recommended for use when the annual stock turnover is 6 turns or less per year. At higher stock turnovers, the basic stock method results in an unrealistic basic stock figure. The method is most appropriate for departments with a high proportion of nonfashion merchandise. The basic stock method of stock planning is based on the assumption that there should always be a basic inventory on hand that remains constant regardless of the rate of sale. The stock to be carried at the beginning of the month is determined by adding the dollar value of the basic stock to the planned sales for that month: BOM Stock ⴝ Sales for the Month ⴙ Basic Stock The basic stock is equal to the average stock for the season minus the average monthly sales. Remember that average monthly sales are the sales for the season, divided by the number of months in the season. Average stock is determined by dividing the sales for the season by the stock turnover for the season. Basic Stock ⴝ Average Stock ⴚ Average Monthly Sales Average Stock for Season ⴝ

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TABLE 8-2 Inventory Needed to Provide 5.2 Weeks’ Supply Week

Planned Sales

Inventory Needed

1

10,200

53,040

2

10,400

54,080

3

10,700

55,640

4

10,600

55,120

5

10,900

56,680

6

11,250

58,500

7

11,000

57,200

8

10,900

56,680

9

10,500

54,600

10

11,000

57,200

11

11,200

58,240

12

11,400

59,280

13

11,500

59,800

14

10,900

56,680

15

10,600

—

16

10,500

—

17

10,500

—

18

10,300

—

19

10,600

—

20

10,800

—

21

10,800

—

22

10,750

—

23

10,700

—

24

10,760

—

25

10,850

—

26

10,670

—

Example 8-14 A department has a planned stock turnover of 4 and planned sales of $160,000 for a six-month season. Plan the BOM stock for April if planned sales for April are $20,000. Solution: (a) Average Stock for Season = =

Sales for Season Stock Turnover for Season $160,000 4

= $40,000 (b) Average Monthly Sales

=

Sales for Season Number of Months in Season

=

$160,000 6

= $26,667

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= Average Stock - Average Monthly Sales

(c) Basic Stock

= $40,000 - $26,667 = $13,333 = Sales for Month + Basic Stock

(d) BOM Stock

= $20,000 + $13,333 = $33,333

Example 8-15 Last year’s BOM stock levels for the fall season were as follows: August, $99,109; September, $109,334; October, $96,202; November, $104,556; December, $123,009; and January, $85,002. Using the sales figures from Example 8-8 and a planned stock turnover of 2.95, calculate basic stock and plan the BOM stock level for each month. Solution:

SALES

FALL

August

September

October

November

December

January

SEASON TOTALS

LY Sales

$43,856

$47,023

$36,224

$49,216

$60,989

$39,099

$276,407

PL Sales

$44,800

$47,600

$36,400

$50,400

$61,600

$39,200

$280,000

2.15%

1.23%

0.49%

2.41%

1.00%

0.26%

1.30%

% of LY Sales

15.87%

17.01%

13.11%

17.81%

22.06%

14.15%

% of PL Sales

16.00%

17.00%

13.00%

18.00%

22.00%

14.00%

LY BOM Stock

$99,109

$109,334

$96,202

$104,556

$123,009

$85,002

$617,212

PL BOM Stock

$101,454

$104,254

$93,054

$107,054

$118,254

$95,854

$619,924

Revised Actual % Change

BOM STOCK

Revised Actual Basic Stock

$56,654

Planned Average Stock for the Season ⴝ Sales for the Season ⴜ Stock Turnover for the Season = $280,000  2.71 = $103,321 Planned Average Monthly Sales ⴝ Season Total Sales ⴜ 6 = $280,000  6 = $46,667 Basic Stock ⴝ Planned Average Stock ⴚ Planned Average Monthly Sales = $103,321 - $46,667 = $56,654 Planned BOM Stock for August ⴝ Sales for Month of August ⴙ Basic Stock = $44,800 + $56,543 = $101,454

Stock–Sales Ratio A common method for planning how much stock should be on hand at a particular time is the stock–sales ratio, which relates the stock on hand at the beginning or, sometimes, the end of the month to the projected retail sales for that month. If the buyer knows the stock–sales ratio for the period being planned the amount of stock that should be on hand at the beginning of the period can be planned easily.

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TABLE 8-3 Stock–Sales Ratios for a Specialty Store Month

Stock–Sales Ratio

Month

Stock–Sales Ratio

February

6.76

August

6.44

March

5.43

September

6.85

April

6.58

October

7.39

May

6.58

November

5.91

June

5.57

December

3.96

July

6.24

January

7.00

Stock–sales ratio is the ratio that exists between the stock on hand at the beginning of the month (or, sometimes, the end of the month) and the retail sales projected for that same month. Median stock–sales ratios vary from year to year and month to month. During periods of high sales, a store or department can operate with a lower stock–sales ratio than during periods of slow sales.

FIGURING STOCK–SALES RATIO WHEN RETAIL STOCK AND SALES FOR A GIVEN PERIOD ARE KNOWN To determine the stock–sales ratio for a period of one month, the BOM stock at retail is divided by the retail sales for that month: Stock 9 Sales Ratio ⴝ BOM Retail Stock ⴜ Sales for the Month

Example 8-16 Determine the stock–sales ratio for May when BOM stock at retail is $50,000 and retail sales for the month are $35,000. Solution: Stock 9 Sales Ratio = BOM Stock at Retail , Net Sales for Month = $50,000 , $35,000 = 1.4286 Note: The inventory was 1.43 times sales for the month; in other words, the store had $143 of merchandise in order to sell $100 worth. Stock–sales ratios from previous comparable sales periods are often used as a guide for planning subsequent stock–sales ratios. For example, if the May stock–sales ratio is 1.43, the merchandiser may set the stock–sales ratio for May of the next year at or close to 1.43.

FIGURING BOM STOCK WHEN PLANNED SALES AND STOCK–SALES RATIO ARE KNOWN The amount of BOM stock that is needed can be determined if planned sales and the desired stock–sales ratio are known: BOM Stock ⴝ Planned Monthly Sales : Stock9Sales Ratio

Example 8-17 The girls’ department had planned sales of $40,000 for the month of May. Past records indicate a stock–sales ratio of 1.43. What should be the planned BOM stock for May? 228

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Solution: BOM Stock = Planned Monthly Sales * Stock 9 Sales Ratio = $40,000 * 1.43 = $57,200 Planned BOM stock is calculated in the same manner for each month of the planning period. The merchandiser reviews prior stock–sales ratios, sets new stock–sales ratios, and plans BOM stock levels for each month accordingly.

Example 8-18 Last year’s BOM stock levels for the fall season were as follows: August, $99,109; September, $109,334; October, $96,202; November, $104,556; December, $123,009; and January, $85,002. a) Using the sales figures from Example 8-8, what were the stock–sales ratios for each month and total for the season last year? b) Using the planned sales figures from Example 8-8 and approximately the same or lower stock–sales ratios, plan the BOM stock levels for each month in the season. Solution: FALL

August

September

October

November

December

January

SEASON TOTALS

LY Sales

$43,856

$47,023

$36,224

$49,216

$60,989

$39,099

$276,407

PL Sales

$44,800

$47,600

$36,400

$50,400

$61,600

$39,200

$280,000

2.15%

1.23%

0.49%

2.41%

1.00%

0.26%

1.30%

% of LY Sales

15.87%

17.01%

13.11%

17.81%

22.06%

14.15%

% of PL Sales

16.00%

17.00%

13.00%

18.00%

22.00%

14.00%

BOM STOCK LY BOM Stock

$99,109

$109,334

$96,202

$104,556

$123,009

$85,002

$617,212

PL BOM Stock

$100,800

$109,480

$96,460

$105,840

$123,200

$84,280

$620,060

LY Stock/Sales Ratio

2.26

2.33

2.66

2.12

2.02

2.17

2.24

PL Stock/Sales Ratio

2.25

2.30

2.65

2.10

2.00

2.15

2.21

SALES

Revised Actual % Change

Revised Actual

(a) Last Year’s StockⴚSales Ratio for August ⴝ Last Year’s Beginning of the Month Stock for August ⴜ Last Year’s Sales for August = $99,109 , $43,856 = 2.26 (b) Planned Beginning of Month Stock for August ⴝ Planned StockⴚSales Ratio for the Month of August ⴛ Planned Sales for the Month of August = 2.25 * $44,800 = $100,800

COMPARISON OF STOCK–SALES RATIO AND STOCK TURNOVER Both stock–sales ratio and stock turnover provide a measure of the relationship between sales and stocks. However, stock–sales ratio differs from stock turnover in the following ways: 1. The period covered for stock–sales ratio usually is shorter than that for stock turnover. Stock–sales ratio is figured for a single month, whereas stock turnover is based on average stock. 2. Stock–sales ratio is based on stock on hand at a specific time, usually the beginning of the month, whereas stock turnover is based on average stock. 3. The numerators and denominators are reversed in the two calculations. In determining stock–sales ratio, stock is divided by net sales; in determining stock turnover, net sales are divided by average stock. The Dollar Merchandise Plan

229

End of the Month Stock As previously noted, the EOM stock for one month is the same as the BOM stock for the following month. Therefore, the merchandiser typically plans the BOM stock levels and then merely uses those calculations to determine the EOM stock levels. When determining the EOM stock level for the last month of the season, the merchandiser typically refers ahead to the BOM levels in next season. However, if the BOM stock level for the next month is not available (such as in the last month of the season), use the average stock level for the season for the last month’s planned EOM stock.

Example 8-19 Using the BOM stock level from Example 8-18, determine the EOM stock levels for each month in the season. Note: When BOM stock levels are unknown for the following month as in the case of the last month of the season, use an average of the BOM stock levels for the season. Solution: August

September

October

November

December

January

SEASON TOTALS

LY EOM Stock

$109,334

$96,202

$104,556

$123,009

$85,002

$102,867

$620,970

PL EOM Stock

$109,480

$96,460

$105,840

$123,200

$84,280

$103,343

$622,603

LY BOM Stock

$99,101

$109,334

$96,202

$104,556

$123,009

$85,002

$617,204

PL BOM Stock

$100,800

$109,480

$96,460

$105,840

$123,200

$84,280

$620,060

LY Stock/Sales Ratio

2.26

2.33

2.66

2.12

2.02

2.17

2.23

PL Stock/Sales Ratio

2.25

2.30

2.65

2.10

2.00

2.15

2.21

FALL EOM STOCK

Revised Actual BOM STOCK

Revised Actual

(a) Last Year’s EOM Stock for August ⴝ Last Year’s BOM Stock for September $109,334 = $109,334 (b) Planned EOM Stock for August ⴝ Planned BOM Stock for September $109,480 = $109,480

Practice Problems • Exercise 8.3 1. At the beginning of September, sleepwear and robes had a retail stock of $65,000. Sales for the month were $18,200. What was the stock–sales ratio for September?

2. Planned sales in the seasonal back-to-school department for July are $32,000, and the planned stock–sales ratio is 3.8. How much stock should be on hand on July 1?

3. If planned sales for the month are $18,000, and the stock–sales ratio is expected to be 1.5, what BOM stock is needed to realize that ratio?

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4. Planned sales in the costume jewelry department for May are $130,000, and the planned stock–sales ratio is 3.4. How much stock will be needed on May 1?

5. What is the planned stock–sales ratio when BOM stock is planned at $64,500 and planned sales are $29,000?

6. For the fall season the stock turnover is expected to be 5.0, what is the weeks’ supply?

7. Given annual sales of $520,000 and an annual turnover rate of 8, what inventory is needed for the first week of the year when the sales are planned at $11,000?

8. During a six-month period, a department had planned sales of $180,000 and a planned turnover of 3.2. Using the basic stock method, determine the BOM stock for March if planned sales for March are $28,000.

9. A department has a planned stock turnover of 4.2 and planned sales of $252,000 for a six-month period. August sales are estimated at $38,000 and September sales at $45,000. Using the basic stock method, determine the BOM stock for August and September.

10. Calculate BOM inventory values for February through July on the basis of the following information: Month

Planned Sales ($)

Stock–Sales Ratio

96,000

3.6

March

112,000

3.2

April

144,000

2.9

May

144,000

2.9

June

176,000

2.7

July

128,000

3.4

February

The Dollar Merchandise Plan

231

Planning Markdowns The next step in merchandise planning is to plan markdowns or retail reductions. In true definition, reductions reduce the retail value of the inventory and include markdowns, discounts to employees and customers, and stock shortages. Each must be anticipated, estimated, and included in the planning process. Because markdowns are the largest component of reductions, most retail firms plan only markdowns rather than total reductions. In establishing the merchandise plan, markdown percents are estimated on the basis of past experience, as well as on current factors that may increase or decrease those percents. The merchandise planner must determine reductions as realistically as possible. Markdowns are expressed as a percent of net sales. As discussed in Chapter 6, the markdown percent is calculated by dividing the dollar amount of net markdown by net sales. Markdown % ⴝ $ Amount of Markdown ⴜ Net Sales Conversely, planned dollar markdowns can be determined by multiplying planned net sales by the planned markdown percent: Planned $ Markdowns ⴝ Planned Sales : Planned Markdown % The merchandise planner reviews and totals last year’s markdowns for each month to calculate the season total markdowns. The percent of markdowns for the last year’s season as a whole and for each month are determined. Applying the organizational goal expressed in an expected percent change in season markdowns, the dollar amount of the planned season markdowns is calculated. Based on last year’s percentage reduction each month adjusted for other internal and external factors, planned markdowns are then distributed among the months in the season.

Example 8-20 Last year’s markdowns for the fall season were as follows: August, $7,441; September, $7,813; October, $8,686; November, $6,661; December, $3,902; and January, $4,789. (a) What was the total dollar amount of markdowns for the season last year? (b) What was the percent of markdowns for each month last year? (c) If the goal is to plan markdowns at approximately the same levels for the next season, what are the planned season markdowns in dollars? (d) Using the percentage of markdowns for each month from last year as a guide, distribute the planned markdowns among the months in the season. (e) What is the resulting percentage change in markdowns for each month? Solution: FALL

August

September

October

November

December

January

SEASON TOTALS

LY Markdowns

$7,441

$7,813

$8,686

$6,661

$3,902

$4,789

$39,292

PL Markdowns

$7,448

$7,840

$8,624

$6,664

$3,920

$4,704

$39,200

-0.23%

Revised Actual 0.09%

0.35%

-0.71%

0.05%

0.46%

-1.77%

% of LY Markdowns

18.94%

19.88%

22.11%

16.95%

9.93%

12.19%

% of Plan Markdowns

19.00%

20.00%

22.00%

17.00%

10.00%

12.00%

% Change

(a) Last Year’s Markdown Dollars for the Season ⴝ August Markdowns ⴙ September Markdowns ⴙ October Markdowns ⴙ November Markdowns ⴙ December Markdowns ⴙ January Markdowns $7,441 + $7, 813 + $8,686 + $8,661 + $3,902 + $4,789 = $39,292 232

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(b) Last Year’s Markdown Percent for August  Last Year’s Markdown Dollars for August  Last Year’s Markdown Dollars for the Season $7,441 ÷ $39,292 = 18.94% (c) Planned Season Total Markdowns  Approximately Last Year’s Season Total M ­ arkdown Dollars In this case last year’s markdowns totaled $39,292 so this year’s markdowns could be planned at $39,200 (d) Planned Markdown Dollars for August  Planned Season Total Markdowns  August Percent of Planned Markdowns $39,200 * 19.00% = $7,448 (Note: 19.00% approximates last year’s August Markdown Percent of 18.94%) (e) Planned Percentage Change in Markdowns for August  (Planned Markdowns for August  Last Year’s Markdowns for August)  Last Year’s Markdowns for August ($7,448 - $7,441) ÷ $7,441 = 0.09%

Planning Purchases A primary objective of merchandise planning is to assist the buyer in timing the purchase of goods in order to maintain a balance between stocks and sales throughout the season. Planned purchases are the amount of merchandise that is planned for delivery to the store or department during a given period without exceeding the planned closing stock for that period. Planned purchases for a month must be adequate to cover the sales and reductions to be made during that month, as well as provide an ending inventory that will allow the following month’s sales to be made. Purchases must be based on planned sales, stock, and markdown figures. To plan monthly purchases, use the following formula: Planned Purchases at Retail  Sales  EOM Stock  Markdowns  BOM Stock

Example 8-21 Determine planned purchases for the month of September, given the following information: Sales for September

$190,000

Stock for September 1

$318,200

Markdowns Stock for October 1

$16,500 $304,800

Solution: Planned Purchases at Retail = Sales + EOM Stock + Markdowns - BOM Stock = $190,000 + $304,800 + $16,500 - $318,200 = $193,100

Example 8-22 Determine planned purchases for the months of June, July, and August, given the following information: Month



Planned Sales ($)

Planned BOM Stock ($)

Planned Markdowns ($)

June

12,500

42,000

1,900

July

17,400

39,000

2,800

August

19,000

43,000

2,200

September

20,500

44,000

1,600 The Dollar Merchandise Plan

233

Solution: Planned Purchases at Retail = Sales + EOM Stock + Markdowns - BOM Stock June

July

Planned Sales ($)

12,500

17,400

19,000

+Planned EOM Stock ($)

39,000

43,000

44,000

+Planned Markdowns ($)

1,900

2,800

2,200

-Planned BOM Stock ($)

-42,000

-39,000

-43,000

11,400

24,200

22,200

Planned Purchases ($)

August

Converting Retail Value to Cost Value Planned purchases are determined at retail and must be converted to cost if cost value is desired. This is done by using the following formula: Planned Purchases at Cost ⴝ Planned Purchases at Retail : (100% ⴚ Planned Markup %)

Example 8-23 If planned retail purchases for the month were $208,000 and the planned markup was 45%, determine planned purchases at cost. Solution: Planned Purchases at Cost = Planned Purchases at Retail * (100% - Planned Markup %) = $208,000 * (100% - 45%) = $208,000 * 55% = $114,400

Example 8-24 Last year’s planned purchases at retail fall season were as follows: August, $60,928; September, $42,420; October, $54,404; November, $74.424; December, $26,600; and January, $62,967. Using a planned initial markup percent of 54.39%, calculate the planned purchases at cost for each month of the season. Solution: August

September

October

November

December

January

SEASON TOTALS

LY Purchases @ Retail

$61,530

$41,704

$53,264

$74,330

$26,884

$61,753

$319,465

PURCHASES

PL Purchases @ Retail

$60,928

$42,420

$54,404

$74,424

$26,600

$62,967

$321,743

AT RETAIL

Revised

PLANNED

Actual PLANNED

LY Purchases @ Cost

$28,008

$18,984

$24,245

$33,825

$12,238

$28,119

$145,420

PURCHASES

PL Purchases @ Cost

$27,789

$19,348

$24,814

$33,945

$12,132

$28,719

$146,747

AT COST

Revised Actual Planned Purchases at Cost for August ⴝ Planned Purchases at Retail for August : 1 100 % ⴚ Planned Markup % 2 = $60,928 * (100% - 54.39%) = $27,789

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Practice Problems • Exercise 8.4 1. If markdowns in the shoe department were $7,680 and net sales were $48,000, what was the markdown percent for the month?

2. Calculate planned June purchases at cost, given the following information: June Sales

$175,000

Reductions

$20,000

BOM Stock for June

$250,000

BOM Stock for July

$150,000

Markup

48%

3. Determine planned purchases (a) at retail and (b) at cost for a month with the following planned figures: Sales

$ 40,000

Markdowns

$2,000

BOM Stock

$98,000

EOM Stock

$101,000

Markup

46%

4. Determine the planned purchases for September (a) at retail and (b) at cost for the children’s department when the seasonal merchandise plan indicates the following planned figures: Sales

$75,000

Markdowns

9%

BOM Stock

$68,000

EOM Stock

$54,000

Markup

48%

Preparation of the Merchandise Plan Although merchandise plans often display many factors, the minimal factors shown on a merchandise plan/ budget are sales, stock, markdowns, purchases, and initial markup percent. Prior to planning for the next season, last year’s actual monthly figures would be entered on the form. Showing last year’s figures on the merchandise plan provides an easy comparison. Season turnover, as well as percents for expenses, reductions, profit goal, cash discounts, and gross margin, are planned and entered on the form. When working through Example 8-25, refer to Figure 8-1, along with the discussion of each step required to complete the merchandise plan. Example 8-25 utilizes the stock-sales planning method for planning inventories. Remember that this is only one of several methods for planning inventory levels. The steps involved in developing a merchandise plan are the same, regardless of the inventory planning method. The following steps serve to complete the merchandise plan: The Dollar Merchandise Plan

235

1. If given, enter the planned percentages for alteration expenses, cash discounts, operating expenses, and net profit. From these figures, calculate and enter initial markup and gross margin. (You may want to review Chapter 5.) 2. Determine the total planned sales for the season and distribute them over each month. 3. Determine BOM stock figures. 4. Determine EOM stock levels. Remember, the EOM stock for any month is the same as the BOM stock for the next month. 5. Determine markdowns planned for each month. (Although reductions include markdowns, shortages, and discounts to employees and special customers and may be a more accurate term to use, merchandisers’ typically refer to markdowns rather than reductions.) 6. Determine monthly planned purchases at retail. 7. Convert monthly planned purchases at retail to cost. (Some forms do not have a place to show monthly planned purchases at cost.) 8. Determine season stock turnover and gross margin return on inventory (GMROI).

Example 8-25 Complete the seasonal merchandise plan on the basis of the following data: % Season’s Sales

Month Planned net sales Operating expenses

$280,000 44.90%

% Season’s Markdowns

Stock–Sales Ratio

August

16

19

2.25

September

17

20

2.3

Planned net profit

3.40%

October

13

22

2.65

Cash discounts

0.30%

November

18

17

2.1

14%

December

22

10

2

January

14

12

2.15

100

100

Markdowns

Total

Solution: Step 1: Calculate initial markup %. Planned Initial Markup % =

Expenses + Profit + Markdowns - Cash Discounts Sales + Markdowns

=

44.9% + 3.4% + 14% - 0.3% 100% + 14%

=

62 114

= 54.39%

Calculate gross margin %. Planned Gross Margin % = Planned Expenses + Planned Profit = 44.9% + 3.4% = 48.3%

Step 2: Distribute monthly sales. Monthly Planned Sales = Planned % of Seasons Sales * Planned Net Sales August

=

16%

*

$280,000

=

$44,800

September

=

17%

*

$280,000

=

$47,600

October

=

13%

*

$280,000

=

$36,400

November

=

18%

*

$280,000

=

$50,400

December

=

22%

*

$280,000

=

$61,600

January

=

14%

*

$280,000

=

$39,200



=

$280,000

Total 236

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100%

Step 3: Determine BOM stock figures. Planned BOM Stock = Planned Stock – Sales Ratio for the Month * Planned Monthly Sales August

=

2.25

*

$44,800

=

$100,800

September

=

2.30

*

$47,600

=

$109,480

October

=

2.65

*

$36,400

=

$96,460

November

=

2.10

*

$50,400

=

$105,840

December

=

2.00

*

$61,600

=

$123,200

January

=

2.15

*

39,200

=

84,280

Step 4: Determine EOM stock figures. (The last month’s EOM inventory is equal to the average inventory.) August

=

$109,480

September

=

$96.460

October

=

$105,840

November

=

$123,200

December

=

$84,280

January

=

$103,343

Step 5: Determine total dollar markdowns and distribute them over each month. (a) Find total planned markdowns = $280,000 * 14.00 = $39,200 (b) Distribute monthly planned markdowns August

19.00%

*

$39,200

=

$7,448

September

20.00%

*

$39,200

=

$7,840

October

22.00%

*

$39,200

=

$8,624

November

17.00%

*

$39,200

=

$6.664

December

10.00%

*

$39,200

=

$3,920

January

12.00%

*

$39,200

=

$4,704

Total

100%

$ 39,200

Step 6: Determine monthly purchases at retail. August

$44,800

+

$109,480

+

$7,448

-

$100,800

=

$60,928

September

$47,600

+

$96,460

+

$7,840

-

$109,480

=

$42,420

October

$36,400

+

$105,840

+

$8,624

-

$96,460

=

$54,404

November

$50,400

+

$123,200

+

$6,664

-

$105,840

=

$74,424

December

$61,600

+

$84,280

+

$3,920

-

$123,200

=

$26,600

January

$39,200

+

$103,343

+

$4,704

-

$84,280

=

$62,967

Step 7: Convert monthly planned purchases at retail to cost. August

$60,928

*

45.61%

=

$27,789

September

$42,420

*

45.61%

=

$19,348

October

$54,404

*

45.61%

=

$24,814

November

$74,424

*

45.61%

=

$33,945

December

$26,600

*

45.61%

=

$12,132

January

$62,967

*

45.61%

=

$28,719

Step 8: Determine season turnover and gross margin return on inventory (GMROI). Planned Season Turnover = Planned Season Total Sales , Planned Average Stock = $280,000 , $103,343 = 2.71 GMROI = Gross Margin Dollars , Average Inventory at Cost = ($280,000 * 48.30%)>[$103,343 * (100% - 54.39%)] = 2.87 The Dollar Merchandise Plan

237

SIX-MONTH MERCHANDISING PLAN % initial markup % markdowns % alteration expense % cash discount % gross margin % operating expense % net profit season turnover average stock GMROI

Department Name: Department Number: Merchandise Manager: Buyer: Period:

SALES

EOM STOCK

MARKDOWNS

BOM STOCK

PLANNED PURCHASES AT RETAIL PLANNED PURCHASES AT COST

FALL LY Sales PL Sales Revised Actual % Change % of LY Sales % of PL Sales LY EOM Stock PL EOM Stock Revised Actual LY Markdowns PL Markdowns Revised Actual % Change % of LY Markdowns % of PL Markdowns LY BOM Stock PL BOM Stock Revised Actual LY Stock/Sales Ratio PL Stock/Sales Ratio LY Purchases @ Retail PL Purchases @ Retail Revised Actual LY Purchases @ Cost PL Purchases @ Cost Revised Actual

AUTHORIZATION SIGNATURES: Buyer Merchandise Manager Controller

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chapter 8

Last Year 54.48% 14.22% 0.00% 0.28% 48.29% 44.91% 3.38% 2.69 $102,867 2.85

Plan 54.39% 14.00% 0.00% 0.30% 48.30% 44.90% 3.40% 2.71 $103,343 2.87

Actual

SEASON TOTALS $276,407 $280,000

August $43,856 $44,800

September $47,023 $47,600

October $36,224 $36,400

November $49,216 $50,400

December $60,989 $61,600

January $39,099 $39,200

2.15% 15.87% 16.00% $109,334 $109,480

1.23% 17.01% 17.00% $96,202 $96,460

0.49% 13.11% 13.00% $104,556 $105,840

2.41% 17.81% 18.00% $123,009 $123,200

1.00% 22.06% 22.00% $85,002 $84,280

0.26% 14.15% 14.00% $102,867 $103,343

$620,970 $622,603

$7,441 $7,448

$7,813 $7,840

$8,686 $8,624

$6,661 $6,664

$3,902 $3,920

$4,789 $4,704

$39,292 $39,200

0.09% 18.94% 19.00% $99,101 $100,800

0.35% 19.88% 20.00% $109,334 $109,480

-0.71% 22.11% 22.00% $96,202 $96,460

0.05% 16.95% 17.00% $104,556 $105,840

0.46% 9.93% 10.00% $123,009 $123,200

-1.77% 12.19% 12.00% $85,002 $84,280

-0.23%

$617,204 $620,060

2.26 2.25 $61,530 $60,928

2.33 2.30 $41,704 $42,420

2.66 2.65 $53,264 $54,404

2.12 2.10 $74,330 $74,424

2.02 2.00 $26,884 $26,600

2.17 2.15 $61,753 $62,967

2.23 2.21 $319,465 $321,743

$28,008 $27,789

$18,984 $19,348

$24,245 $24,814

$33,835 $33,945

$12,238 $12,132

$28,110 $28,719

$145,420 $146,747

AUTHORIZATION DATE:

1.30%

Forms that are used for six-month merchandise plans vary from retailer to retailer. Less formal and less detailed plans may be used by small retail organizations, while larger organizations may use a plan with more detail. The form used in Example 8-25 allows for comparisons of actual sales, markdowns, stock levels, and planned purchases with last year’s figures and with planned figures.

Practice Problems • Exercise 8.5 1. Develop a merchandise plan on the basis of the information that follows. Sales for the six-month spring– summer season have been planned to total $650,000. Markdowns for the total season are to be 22.0% of planned sales, and season’s turnover should be 1.9. BOM inventory values are to be planned by the basic stock method. In this problem, ending inventory will be the same as the average inventory. (A merchandise plan form is provided to complete the problem.) Month

% of Season’s Sales

% of Season’s Markdowns

February

15.5

15

March

17.5

12

April

19.0

19

May

18.0

16

June

15.5

18

July

14.5

20

(a) Total sales for the season are $650,000. Determine sales for each month. (b) Calculate total $ markdowns and allocate markdowns to each month on the basis of the percentages given. (c) Using the basic stock method, calculate BOM inventory values for each month. (d) Enter the EOM inventory values on the form. July’s ending inventory has been given as the average inventory. (e) Calculate planned purchases at retail. (f) Calculate initial markup percent needed, given the following information: Markdowns

22.0%

Operating expenses

34.0%

Profit desired

7.5%

The Dollar Merchandise Plan

239

SIX-MONTH MERCHANDISING PLAN

Last Year

Department Number: Merchandise Manager: Buyer: Period:

EOM STOCK

MARKDOWNS

BOM STOCK

PLANNED PURCHASES AT RETAIL PLANNED PURCHASES AT COST

SPRING LY Sales PL Sales Revised Actual % Change % of LY Sales % of PL Sales LY EOM Stock PL EOM Stock Revised Actual LY Markdowns PL Markdowns Revised Actual % Change % of LY Markdowns % of PL Markdowns LY BOM Stock PL BOM Stock Revised Actual

Merchandise Manager Controller

240

chapter 8

February

March

April

May

June

July

Basic Stock LY Purchases @ Retail PL Purchases @ Retail Revised Actual LY Purchases @ Cost PL Purchases @ Cost Revised Actual

AUTHORIZATION SIGNATURES: Buyer

Actual

% initial markup % markdowns % alteration expense % cash discount % gross margin % operating expense % net profit season turnover average stock GMROI

Department Name:

SALES

Plan

AUTHORIZATION DATE:

SEASON TOTALS

2. Using the merchandise plan completed in Problem 1, calculate stock–sales ratios for each month.

3. The sport dress classification of a specialty store was given the following figures to use in developing a merchandise plan for the spring/summer season: Month

% of Season’s Sales

BOM Stock–Sales Ratio

% of Season Markdowns

February

14.0

3.8

16.8

March

16.0

4.2

14.26

April

20.0

3.5

15.64

May

17.5

3.6

15.28

June

16.5

3.7

16.20

July

16.0

3.9

21.82

Develop a merchandise plan, using the form provided. (a) Distribute total season’s sales of $222,600 over each month. (b) Calculate monthly dollar markdowns and total season dollar markdowns if the season markdown percent is 5.5%. (c) Plan BOM stock values. (d) Enter EOM values. Use $124,359 for the July EOM. (e) Calculate monthly planned purchases at retail. (f) Calculate monthly planned purchases at cost if the initial markup percent is 50.5%. (g) Calculate turnover for the season.

The Dollar Merchandise Plan

241

SIX-MONTH MERCHANDISING PLAN

Last Year

Department Name: Department Number: Merchandise Manager: Buyer: Period:

SALES

EOM STOCK

MARKDOWNS

BOM STOCK

PLANNED PURCHASES AT RETAIL PLANNED PURCHASES AT COST

SPRING LY Sales PL Sales Revised Actual % Change % of LY Sales % of PL Sales LY EOM Stock PL EOM Stock Revised Actual LY Markdowns PL Markdowns Revised Actual % Change % of LY Markdowns % of PL Markdowns LY BOM Stock PL BOM Stock Revised Actual LY Stock/Sales Ratio PL Stock/Sales Ratio LY Purchases @ Retail PL Purchases @ Retail Revised Actual LY Purchases @ Cost PL Purchases @ Cost Revised Actual

AUTHORIZATION SIGNATURES: Buyer Merchandise Manager Controller

242

chapter 8

Plan

Actual

% initial markup % markdowns % alteration expense % cash discount % gross margin % operating expense % net profit season turnover average stock GMROI

February

March

April

May

June

July

AUTHORIZATION DATE:

SEASON TOTALS

Definitions Definitions

Average Stock – Sum of the stock at the beginning of a period, the stock at the beginning of similar periods, and the stock at the end of the period, divided by the total number of stock listings.

Planned Purchases – The dollar amount of merchandise that should arrive in the store during a month in order to make planned sales and maintain an appropriate stock level.

Basic Merchandise/Basics – The assortment of merchandise that should be maintained at all times. This merchandise consists of staples that have a highly predictable sales rate because customer demand for such merchandise remains relatively consistent.

Sales Curve – A retailing tool that is used to express the variation in the rate of sale of an item or a group of items (category) over a certain period, usually six months or a year.

Basic Stock – The assortment of merchandise that should be maintained at all times. This merchandise consists of staples that have a highly predictable sales rate because customer demand remains relatively consistent.

Stock–Sales Ratio – The ratio that exists between the stock on hand at the beginning of the month (or, sometimes, the end of the month) and the retail sales projected for that same month. This is one method used to determine the proper amount of stock to be kept in inventory.

Dollar or Seasonal Merchandise Plan/Six-Month Plan – A projection of the sales goals of a department, a classification, or an entire store for each month of a six-month period. This type of plan indicates the rate at which money should be used for purchases in order to maintain the desired balance between stock and sales.

Stock or Inventory Turnover/Stock Turn – The number of times during a given period that the average inventory on hand is sold and replaced. This ratio is commonly calculated for one year or a six-month season. Stock turnover is determined by dividing net sales by average inventory at retail.

Open-to-Buy – The amount of merchandise in dollars or units that a retailer may order during the balance of a period.

Weeks’ Supply – A method of planning stock whereby the needed inventory is equal to the sales for a specific number of weeks.

Summary Problems Chapter 8 • Summary Problems

1. Planned sales for June this year are $120,000. Last year, the actual sales for June were $110,000. Determine the planned percent increase in sales for the month.

2. The rug department is planning a 15% reduction in sales this year. If last year’s sales were $525,000, what is this year’s planned sales figure?

3. Establish a six-month percentage sales curve for dress shirts, given the following sales information: February, $1,560; March, $2,040; April, $2,160; May, $2,160; June, $2,280; July, $1,800.

4. Express the sales curve in problem 3 as a ratio.

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5. In planning for the next year, the buyer in problem 3 noted that she ran out of white shirts on June 12 and did not receive more in stock until the end of the month. She estimated that she could have sold an additional 12 of the shirts in June at an average retail price of $30.00. Revise the percentage sales curve to reflect these lost sales.

6. Determine the average stock for the spring season for a department that has the following beginning of the month inventories: $32,800 for February; $30,600 for March; $31,950 for April; $33,650 for May; $32,700 for June; $34,250 for July; and $34,500 for August.

7. A buyer is expecting a seasonal stock turnover rate of 13 and seasonal sales of $1,947,400. Calculate a) the weeks’ supply, b) the average weekly sales, and c) the inventory needed if using the average weekly sales.

8. If last year’s sales were $906,050 and a store was planning an increase in sales of 3.75% and a markdown percent of 18.25%, what is planned markdown in dollars?

9. What was the markdown percent for last year if the net sales totaled $79,005 while markdowns were as follows: Month

Markdown Dollars ($)

February

2,985

March

2,455

April

2,186

May

2,234

June

2,866

July

3,274

10. The planned sales for a department are $38,000 and the stock–sales ratio is planned at 1.8. Find the BOM stock that is needed to realize this ratio.

11. During a six-month period, a department had planned sales of $250,000 and a planned turnover of 3.2. The planned sales for May are $38,000. Using the basic stock method, determine the BOM stock for May.

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12. During February, junior dresses had BOM stock of $200,000 and net sales for the month were $151,250. The EOM inventory was $275,000. What was the stock turnover for the month?

13. Determine the dollar sales for April, May, June, and July, given the following seasonal sales distribution (you must first determine total sales for the season): Month

% of Season’s Sales

Monthly Sales ($)

February

12

96,000

March

14

112,000

April

18

—

May

22

—

June

20

—

July

14

14. Calculate the average stock in a department with annual sales of $1,840,000 and an annual stock turnover of 5.4.

15. Determine the stock turnover for a six-month period (February to July) from the following information: Month

Sales ($)

BOM Stock ($)

February

20,000

32,000

March

28,000

38,000

April

27,000

35,000

May

24,000

36,000

June

18,000

29,000

July

23,000

34,000

August

25,000

36,000

September

29,000

38,000

October

23,000

32,000

November

26,000

35,000

December

32,000

42,000

January

28,000

36,000

16. Determine the stock–sales ratio when the planned sales for August are $36,000 and the retail stock for August 1 is $120,000.

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17. Find the planned April purchases at retail with the following figures: Sales

$220,000

BOM Stock for April

$380,000

BOM Stock for May

$240,000

Markup

51%

Markdowns

2.3%

18. Using the figures provided in problem 17, calculate the planned April purchases at cost.

19. Calculate monthly planned purchases at retail and at cost for the men’s clothing department if the planned total fall–winter season’s sales are $860,000. (Use the merchandise plan form provided.) Total markdowns for the season are planned at 14.6% of the season’s sales. January’s EOM inventory is planned at $510,000. Initial markup percent is planned at 52%. Month

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% of Season’s Sales Stock–Sales Ratio

% of Season’s Markdowns

August

14

4.2

18

September

16

4.0

15

October

15

4.1

15

November

17

3.6

12

December

23

3.2

13

January

15

4.1

27

SIX-MONTH MERCHANDISING PLAN

Last Year

Department Name: Department Number: Merchandise Manager: Buyer: Period:

SALES

EOM STOCK

MARKDOWNS

BOM STOCK

PLANNED PURCHASES AT RETAIL PLANNED PURCHASES AT COST

Plan

Actual

January

SEASON TOTALS

% initial markup % markdowns % alteration expense % cash discount % gross margin % operating expense % net profit season turnover average stock GMROI

FALL LY Sales PL Sales Revised Actual % Change % of LY Sales % of PL Sales LY EOM Stock PL EOM Stock Revised Actual LY Markdowns PL Markdowns Revised Actual % Change % of LY Markdowns % of PL Markdowns LY BOM Stock PL BOM Stock Revised Actual LY Stock/Sales Ratio PL Stock/Sales Ratio LY Purchases @ Retail PL Purchases @ Retail Revised Actual LY Purchases @ Cost PL Purchases @ Cost Revised Actual

AUTHORIZATION SIGNATURES:

August

September

October

November

December

AUTHORIZATION DATE:

Buyer Merchandise Manager Controller

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20. The linen department has planned sales of $375,000 for the spring–summer season. The turnover goal for the season is 1.8. Using the form provided, develop a six-month merchandise plan on the basis of the following information: Markdowns

10%

Operating expenses

40%

Profit

5.5%

Cash discounts

0.9% Month

% of Season’s Sales

% of Season’s Markdowns

February

16

15

March

15

18

April

16

15

May

17

20

June

19

16

July

17

16

(a) Calculate initial markup %. (b) Distribute monthly planned sales. (c) Determine monthly dollar markdowns. (d) Determine BOM stock figures. (e) Find monthly planned purchases at retail. (f) Find monthly planned purchases at cost.

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SIX-MONTH MERCHANDISING PLAN

Last Year

Department Name: Department Number: Merchandise Manager: Buyer: Period:

SALES

EOM STOCK

MARKDOWNS

BOM STOCK

PLANNED PURCHASES AT RETAIL PLANNED PURCHASES AT COST

Plan

Actual

% initial markup % markdowns % alteration expense % cash discount % gross margin % operating expense % net profit season turnover average stock GMROI

SPRING LY Sales PL Sales Revised Actual % Change % of LY Sales % of PL Sales LY EOM Stock PL EOM Stock Revised Actual LY Markdowns PL Markdowns Revised Actual % Change % of LY Markdowns % of PL Markdowns LY BOM Stock PL BOM Stock Revised Actual

February

March

April

May

June

July

SEASON TOTALS

Basic Stock LY Purchases @ Retail PL Purchases @ Retail Revised Actual LY Purchases @ Cost PL Purchases @ Cost Revised Actual

AUTHORIZATION SIGNATURES:

AUTHORIZATION DATE:

Buyer Merchandise Manager Controller

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Case Study 1 Markdown Mayhem Tammy Kinley, Ph.D. University of North Texas Congratulations! You have just been hired as a buyer in the missy department in Gregory’s Department Store. This department, one of several in a large national department store, contains dresses, suits, and career separates for missy sizes 2–16. The target market is working professional women,

age 30 to 55, with a combined household income of $100,000 or more. Most are in the full-nest family cycle stage, meaning that they have children living at home. Today is April 3, and this is the first time you have seen the actual figures for the current plan, part of which is as follows: Plan

SIX-MONTH MERCHANDISING PLAN Department Name: Missy Department Number: 1000 Merchandise Manager: Buyer: Period: Spring

SALES

EOM STOCK

MARKDOWNS

BOM STOCK

PLANNED PURCHASES AT RETAIL PLANNED PURCHASES AT COST

SPRING PL Sales Revised Actual % difference % of PL Sales PL EOM Stock Revised Actual PL Markdowns Revised Actual % difference % of PL Markdowns PL BOM Stock Revised Actual PL Purchases @ Retail Revised Actual PL Purchases @ Cost Revised Actual

AUTHORIZATION SIGNATURES: Buyer Merchandise Manager Controller 250

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Actual

% initial markup % markdowns % alteration expense % cash discount % gross margin % operating expense % net profit season turnover average stock GMROI February $75,000

March $110,000

$75,125

$112,500

$244,058

SEASON July TOTALS $60,000 $500,000

April $95,000

May $80,000

June $80,000

$229,058

$214,058

$214,058

$194,058

$217,391

$234,775 $7,150

$256,661 $3,850

$5,500

$8,250

$16,500

$13,750

$8,500

$13,580

$209,058

$244,058

$229,058

$214,058

$214,058

$194,058

$208,139

$243,775

AUTHORIZATION DATE:

$55,000

The second month of the spring season has just ended. The seasonal goals are an average initial markup of 47.30%, a net profit of 5.50%, and a turnover of 2.3.

3. Calculate the actual planned purchases at retail and

DISCUSSION QUESTIONS FOR CASE STUDY 1

4. If business continues on this track, what results would you

1. Calculate the planned markdown percent. Include the

at cost. What will be the immediate impact on planned purchases for April? expect to see at the end of the six months?

planned markdown percent along with the planned initial markup percent, net profit percent, and turnover on the six-month merchandise plan.

5. Propose two different solutions that might enable your

2. Calculate the percent difference between planned and actual

your department to end the season on plan for markdowns.

sales and markdowns for February and March.

department to end the season on plan for sales.

6. Propose two different solutions that might enable

Case Study 2 Key Sales and Inventory Analysis of a Jewelry Company Gary Wolf, M.S. Fashion Institute of Technology* After their success in the United States, Fine Fashion Ltd (FF Ltd), a fashion jewelry company has expanded operations to London, UK. (A) The company recently added a new line of fine jewelry to their inventory portfolio. The carry forward inventory as of January 1, included 50 ruby necklaces, 150 wedding rings, and 35 sapphire earrings. By the end of January only 22 ruby necklaces and 70 wedding rings were left. However, more inventories of fine jewelry were purchased in February. The preceding and subsequent inventory overview is only of fine jewelry: • The EOM stock in February was only 12 ruby necklaces. • The net sales during this two month period of January and February were of 637 units (pieces) in total. (B) Although FF Ltd, achieved success in their segment of fine jewelry in the United Kingdom, they were unable to attain their desired goals in their mainstream business of fashion jewelry in London. The inventory carried into January for fashion jewelry was £ 180,200 and that in February was £ 112,300. Incremental inventory was sold by the end of February when inventory was £ 93,100.

When a research team looked into the cause of the company’s failure, it was concluded that FF Ltd had to differ its merchandise strategy used in the United Kingdom from the one used in the United States despite sharing the same demographics. The psychographics of the target customers are contrasting in the US vs. the UK market. Too many markdowns, such as 30% in January and 25% in February, worked well in the United States, but devalued the brand’s image in the United Kingdom. Another reason for their failure was the false lighting in the store. Under the bright yellow light of the store, the real color of the jewelry was often not visible to customers. The lighting issue made the jewelry appear sparkling which increased sales, which were £ 124,200 in January and £ 98,200 in February. However, when the customers reached home, they were dissatisfied to find the real color of their newly bought jewelry, which resulted in excessive returns of 16% and 12% in January and February, respectively. (C) To recover the loss, the company has redefined its merchandise strategy. The company is now minimizing markdowns, which are $3,000 for the month of March. Moreover the company is also hoping to achieve its desired stock turnover of four times for a six-month period.

*Refer to conversion rate from Pound (£) to US Dollar ($) of 1£ = 1. 62 USD to complete this case study.

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DISCUSSION QUESTIONS FOR CASE STUDY 2

• What is the planned purchase for January and February?

1. PART A

3. PART C

• Find the average stock and stock turnover in units of fine jewelry.

• Calculate weeks’ supply of inventory for March • Calculate the company’s OTB at retail and at cost as of March 1, given: • The planned sales for March are $93,200 • Planned EOM stock is $133,000 • The company ordered inventory of $32,000 as on March 1 • Planned initial markup is 25%

2. PART B • Determine the average stock and stock turnover for January and February in US Dollars • Find the stock–sales ratio for FF Ltd’s fashion jewelry division for January and February

Case Study 3 Six-Month Merchandise (Dollar) Planning Lucy Simpson, M.S. The University of Tennessee After completing her training period, Heather has been placed in a planning position with the Moderate Sportswear Buying team. The Planning Divisional has given her the project of planning sales, markdowns, and stock levels for Misses Coordinates Last Year PLAN % +/Markdowns Last Year LY MD % PLAN Plan MD % BOM Last Year PLAN EOM Last Year PLAN Stock to Last Year Sales ratio PLAN Purchases Last Year Plan *all figures in thousands Sales

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Misses Coordinates for the next fall season. Since she is new to the company and does not know the history of last year, she is given last year’s report and the following goals and notes:

Aug. $197.0

Sept. $257.0

Oct. $292.0

Nov. $310.0

Dec. $485.0

Jan. $149.0

TOTAL $1,690.0

$109.8 55.74%

$106.5 41.44%

$88.4 30.27%

$106.9 34.48%

$128.1 26.41%

$115.7 77.65%

$655.4 38.78%

$674.0

$739.0

$821.0

$1,039.0

$1,338.0

$843.0

$5,454.0

$739.0

$821.0

$1,039.0

$1,338.0

$843.0

$891.0

3.4

2.9

2.8

3.4

2.8

5.7

$376.0

$450.0

$604.0

$722.0

$126.0

$361.0

3.2 $2,639.0

FEB

$891.0

Misses Coordinates Fall Goals

SALES MARKDOWN % TURNOVER

LAST YEAR

TY PLAN

$1,689.0

$1.892.0

38.8%

37.0%

1.86

1.90

Projected July EOM

As a new planner, Heather has worked diligently on the sixmonth plan, and has planned her sales, markdowns, inventory levels, and purchases by month. She is ready to set up a meeting with her Planning Divisional and go over her plan. DISCUSSION QUESTIONS FOR CASE STUDY 3

$950.0

1. Calculate the stock–sales ratio and purchases by month.

Notes: a.

The company is adding a new major sale event to the month of September. On the 5-4-5 calendar, Christmas is one day earlier in the week. c. The direction from upper management is that old season goods should be cleared out in August and January. d. Last year, because of poor receipt flow from vendors, August and September were under-receipted to plan and October was over receipted to plan. e. The largest promotional sale continues to be in October. f. The most current OTB projection shows July EOM at $950.0 b.

2. Analyze each element of the plan by month. Do you agree that each one is planned correctly? Why or why not? • Sales? • Markdowns? • Inventory levels? • Purchases?

3. What suggestions would you give to Heather before she goes into her meeting with her Divisional?

New Plan

Misses Coordinates Sales Last Year PLAN % ⴙ/ⴚ Markdowns Last Year LY MD % PLAN Plan MD % BOM Last Year PLAN EOM Last Year PLAN Stock to Last Year Sales ratio PLAN Purchases Last Year Plan *all figures in thousands

Aug. $197.0 $220.5 11.93% $109.8 55.74% $100.0 45.35% $674.0 $1,300.0 $739.0 $1,159.8 3.4

Sept. $257.0 $287.7 11.95% $106.5 41.44% $108.4 37.68% $739.0 $800.0 $821.0 $1,191.4 2.9

Oct. $292.0 $326.9 11.95% $88.4 30.27% $99.0 30.27% $821.0 $755.0 $1,039.0 $1,312.8 2.8

Nov. $310.0 $347.1 11.97% $106.9 34.48% $119.7 34.48% $1,039.0 $800.0 $1,338.0 $1,650.4 3.4

Dec. $485.0 $543.0 11.96% $128.1 26.41% $143.4 26.41% $1,338.0 $1,100.0 $843.0 $1,024.8 2.8

Jan. $149.0 $166.8 11.95% $115.7 77.65% $129.5 77.65% $843.0 $1,100.0 $891.0 $1,103.5 5.7

TOTAL $1,690.0 $1,892.0 11.95% $655.4 38.78% $700.0 0.37 $5,454.0 $5,855.0

$376.0

$450.0

$604.0

$722.0

$126.0

$361.0

$2,639.0

FEB

$891.0 $1,100.0

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OPEN-TO-BUY and

ASSORTMENT PLANNING

OBJECTIVES • To distinguish between open-to-buy (OTB), assortment planning, and inventory replenishment. • To calculate dollar and unit OTB • To understand assortment planning and the difference between a basic stock list and a model stock plan. • To calculate number of units to be reordered to maintain stock levels. KEY POINTS • Open-to-buy is used as a control device to see that purchasing is done according to the merchandise plan. OTB enables the buyer to determine the balance of purchases remaining, in dollars or in units, for any given period. • OTB cannot be determined unless the amount of stock on hand is known. This amount may be obtained by a physical inventory count or calculated through the retail method of inventory (RIM). • Although dollar planning is the most basic type of planning, assortment planning is another tool used in balancing the merchandise assortment with customer demand.

9 255

• Assortment plans may be developed by (1) a basic stock list or (2) a model stock plan. A basic stock list is used for basic items that remain consistent in demand, whereas a model stock plan is used for fashion merchandise. • Maintenance of inventory levels requires regular review of merchandise on hand and merchandise on order.

Career Corner Associate Merchant Jillian Cleary Zales Corporation Description of Job Responsibilities In my job as an Associate Merchant with Zales Corporation, I am responsible for reviewing standard business metrics as well as analyzing market trends with competitive shopping and reviewing fashion publications and other industry information. Testing new product throughout the year helps to quantify investment risk and expansion opportunity. I must utilize return-on-investment (ROI) metrics, item pricing, Jillian Cleary / Zale Corporation and marketing strategies to drive sales and margin. Further, I collaborate with our merchandise planner in order to optimize inventory levels, maximize instocks, and achieve planned turnover rates. I also work with our internal marketing and visual team on planogram concepts and selection of key items for marketing media. Another important responsibility as an Associate Merchant is to develop and guide Assistant Merchants. It is important to be a role model and mentor to brighten the future of our company. Relevance of Merchandising Mathematics As an Associate Merchant, I use merchandising mathematics for reviewing standard business metrics on a regular basis to

understand trends and opportunities within each category. Analytical and market research help to build an appropriate assortment, develop key items, and maximize trends for a specific merchandise category. Career Path While in school at Texas State University-San Marcos, I worked in a Zales outlet retail store as a Sales Associate. When I met the brand president and vice president on one of their store visits, I expressed to them my interest in merchandising. They gave a brief explanation of the Merchandising Training Program that was offered through their corporate office. I submitted my resume and applied for the program. Unfortunately, the timing of the training program did not coincide with my college graduation, so I was instead offered employment as a Detail Assistant to begin to learn the business from the ground up. Shortly after, I was promoted to the role of an Assistant Buyer in the Diamond Solitaire Department. I was then promoted as a Merchandise Planner to learn the financial side of the business. This was integral to learning the full life cycle of the product and the business. My next step was a promotion to Manager of Planning and Allocations, where I developed critical managerial skills, which have proven valuable in my current roll as Associate Merchant. Advice for Students Interested in Merchandising Careers The biggest misconception of merchandising is that you work with product all day long. In actuality, only about 20% of my time is spent on product, with the other 80% devoted to financerelated tasks. Having a passion for retailing and understanding the fundamentals will lead to success, whether you’re working with diamonds, apparel, or any other product.

The dollar merchandise plan serves as a guide for monthly sales, markdowns, and inventory levels. The retailer, and especially the buyer, must regularly monitor progress toward achieving the dollar merchandise plan. Typically, weekly sales and markdown figures are reviewed and estimated inventory is calculated. Some companies will review figures more frequently while others may wait longer. The sooner the retailer becomes aware of discrepancies between the plan and actual progress, the easier it is to make adjustments. For example, if sales are lower than planned, strategies can be initiated to increase sales. However, if sales are higher than expected, the buyer may need to adjust purchasing plans to replenish diminishing inventory.

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Buyers use several tools to monitor progress and refine purchasing plans. OTB determination, assortment planning, and inventory replenishment calculations are all vital processes in maintaining adequate and appropriate inventory levels.

Open-to-Buy As stated in the previous chapter, the two major tools of merchandise planning are the dollar merchandise plan and the OTB. The merchandise plan projects to the future and serves as a guide for a selling period that has not yet begun. The open-to-buy, also known as open-to-receive, serves as a control device to see that purchasing is carried out according to the figures outlined in the six-month merchandise plan. Through the OTB, management controls the purchasing activity of the buyers so that only the merchandise needed to fulfill the plan is procured and excessive purchasing of inventory is avoided. The seasonal merchandise plan indicates the dollar amount of purchases planned for each month of a season. These planned-purchase figures, which represent the amount of stock the buyer plans to receive during the month, determine the purchase limit for the month. Usually, a retailer does not purchase all of its inventory at the beginning of the month; rather, the retailer purchases a portion of the inventory at various times during the month. Also, on the first of the month, the buyer may have outstanding orders, which will reduce the amount of additional purchases allowed for the month. In its role as a control device, open-to-buy is a calculation made at frequent intervals throughout a given period to find the amount of merchandise that may be received into stock during the period, without exceeding the planned closing stock level at the end of the period. OTB may be calculated in dollars or in units of merchandise. Dollar OTB is always calculated at retail, unless otherwise stated. In its simplest form, OTB is calculated by subtracting the merchandise available from the merchandise needed to meet the plan. OTB ⴝ Merchandise Needed ⴚ Merchandise Available Merchandise available to the buyer includes merchandise on hand, merchandise received, merchandise in transit, and merchandise still on order (outstanding orders). The merchandise that the buyer needs consists of planned sales, planned markdowns or reductions, and EOM inventory. OTB ⴝ Planned Sales ⴙ Planned EOM Stock ⴙ Markdowns ⴚ Inventory on Hand ⴚ Merchandise on Order If the need is greater than the merchandise available, the buyer is OTB. If the reverse is true and the buyer has more merchandise available than is needed, the buyer has overbought and does not have any OTB. It is important for buyers to hold back some of their OTB dollars for several reasons: (1) New lines or items may appear that the buyer wishes to purchase. (2) Special promotions from vendors may become available. (3) Reorders may need to be placed to fill in staple stock or replace fast-selling items. Successful buyers know that some OTB should always be kept available to allow them to take advantage of good buying opportunities and to react to changing consumer demand.

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Increasing Open-to-Buy Sometimes a buyer is overbought or does not have sufficient OTB to make a desired purchase. Increasing the merchandise needed or decreasing the merchandise available will increase the funds available to purchase additional stock. To increase an inadequate OTB or to correct an overbought situation, the buyer may consider the following actions: 1. Increase the planned sales. This should be done only when conditions truly indicate that sales will increase. If a planned sales increase is not met, the buyer will have excess inventory at the end of the period. Thus, the overbought problem is not resolved. 2. Increase planned markdowns. Markdowns should be taken only if they are needed to move goods to increase sales. Taking unnecessary markdowns is a costly way to increase OTB. Increases in markdowns often negatively impact margin results. 3. Reduce the stock on hand. This can be done by returning goods to the vendor or transferring goods to another store or department. Returning goods to the vendor is often unethical; however, the buyer can check to see if goods are in stock that may be legally returned to the vendor. Sometimes agreements are made with vendors allowing the return of merchandise that has not been sold by a specified date. In addition, it may be possible to transfer goods to another department or store, such as the company’s outlet store. 4. Postpone outstanding orders to a later month. If an outstanding order has not yet been received, it may be possible to postpone its delivery until a future month. This approach would reduce the outstanding orders for the current month and make it possible to place new orders for current delivery. A vendor that is having difficulty meeting a delivery date may be willing to postpone the date. 5. Cancel outstanding orders. This is a legitimate practice if orders are overdue; otherwise, it is unethical. If an order has not been received by the due date specified on the order form, the buyer may cancel the order because the vendor has failed to meet the purchase contract. Cancelling an order will reduce the figure for on-order merchandise and thereby increase OTB. 6. Increase the planned closing stock. This procedure is justified if the original stock plan was inaccurate or if the sales for the following month are likely to be more than originally estimated.

Figuring Open-to-Buy The examples that follow illustrate how to figure OTB at the beginning of the month and during the month. You can determine OTB when the amount of stock on hand is known, and when the value of that stock is unknown. Example 9-1 illustrates how to find OTB at the beginning of a month when the value of the inventory is known.

Example 9-1 A buyer had an inventory of $30,000 on May 1 and planned EOM stock of $34,000 for May 31. Planned sales for the department were $26,000 and planned markdowns for the month were $2,500. As of May 1, the buyer had merchandise on order of $8,000 at retail to be delivered during the month. Planned initial markup was 45%. Calculate the buyer’s OTB at retail and at cost as of May 1. These figures would be derived from a merchandise plan that would appear as follows:

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May LY Sales

SALES

PL Sales Revised Actual LY EOM Stock PL EOM Stock Revised Actual LY Markdowns PL Markdowns Revised Actual LY BOM Stock PL BOM Stock Revised Actual LY Purchases @ Retail PL Purchases @ Retail Revised Actual

EOM STOCK

MARKDOWNS

BOM STOCK

PLANNED PURCHASES AT RETAIL

$26,000

$34,000

$2,500

$30,000

$32,500

$8,000 45%

Merchandise on Order for May Delivery Initial Markup % Solution:

OTB = Planned Sales + Planned EOM + Markdowns - Inventory on Hand - Stock on Order Merchandise needed: Planned sales

26,000

Planned markdowns

2,500

Planned EOM stock

34,000 62,500

Merchandise available: Actual BOM stock Stock on order

30,000 8,000 38,000

OTB at retail

24,500

OTB at Cost = OTB at Retail * (100 - Initial Markup %) = 24,500

* (100 - 45%)

= 24,500

* 55%

= 13,475 The buyer often needs to know OTB during the month. Deviations in actual figures from the plan require the buyer to make adjustments in order to maintain the balance between stock and sales. Actual on-hand and on-order stock amounts are used when available. Example 9-2 demonstrates how OTB is figured during the month when the value of the stock on hand is known.

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Example 9-2 Determine the OTB as of June 15, given the following information (sales and markdowns for the remainder of the month are the differences between the planned and actual figures for the first 15 days): Merchandise on hand, June 15

$36,000

Planned sales, June 1 to 30

$26,000

Actual sales, June 1 to 15

$14,000

Planned markdowns for June

$2,500

Actual markdowns, June 1 to 15 Planned stock at retail, July 1

$900 $30,000

Stock on order, June 15

$3,000

Solution: Merchandise needed, June 15 to 30: Planned EOM stock, June 30

30,000

Planned sales, June 1 to 30

26,000

Actual sales, June 1 to 15

14,000

Balance of planned sales, June 15 to 30 Planned markdowns, June 1 to 30

12,000 2,500

Actual markdowns, June 1 to 15

900

Balance of planned markdowns, June 15 to 30

1,100

Total merchandise needed, June 15 to 30

43,600

Merchandise available as of June 15: Stock on hand, June 15

36,000

Stock on order, June 15

3,000 39,000

Total merchandise available, June 15 OTB, June 15

4,600

The buyer can easily determine OTB when the amount of stock on hand is given. Sometimes this information is not readily available and must be calculated in order to find OTB. The information may be obtained by a physical inventory or calculated through the retail method of inventory (RIM). When the value of the stock on hand is not known, it can be determined by subtracting the total deductions in inventory (sales and markdowns) from the total merchandise handled (BOM stock + purchases received). Example 9-3 shows how to determine OTB during the month when the value of the stock on hand is unknown. (See Chapter 7 to review the calculation of RIM.)

Example 9-3 Calculate the buyer’s OTB as of March 11 on the basis of the following information: BOM stock, March 1

$42,000

Purchases received, March 1 to 11

$10,000

Merchandise on order, March 11 Planned sales for March Actual sales, March 1 to 11

$5,500

Planned markdowns

$2,000

Actual markdowns, March 1 to 11 Planned EOM stock, March 31 260

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$5,000 $18,000

$800 $40,000

Solution: Merchandise needed, March 11 to 31: Planned EOM stock, March 31

40,000

Planned sales for month

18,000 5,500

Actual sales, March 1 to 11 Balance planned sales, March 11 to 31

12,500

Planned markdowns for month

2,000

Actual markdowns, March 1 to 11

800 1,200

Balance planned markdowns, March 11 to 31 Total merchandise needed

53,700

Merchandise available as of March 11: BOM stock, March 1

42,000

Purchases received, March 1 to 11

10,000

Total merchandise handled

52,000

Actual sales, March 1 to 11

5,500

Actual markdowns, March 1 to 11

800 6,300

Total deductions in inventory Merchandise on hand,* March 11

45,700

Merchandise on order, March 11

5,000 50,700

Total merchandise available, March 11 OTB, March 11

3,000

Note: *In this example, the value of the stock on hand was not provided. Stock on hand was determined by subtracting the total deductions in inventory from the total merchandise handled.

Practice Problems • Exercise 9.1 1. On the basis of past sales and current business conditions, a buyer estimates that October sales will be $7,500. The stock at retail on October 1 is $20,000, and $6,000 stock at retail is on order for the month. Markdowns are planned at $700 for the month, and the planned EOM stock is $19,000. What is the buyer’s OTB on October 1?

2. Given the following data, determine the OTB as of May 10: Stock on hand at retail, May 10

$16,500

Stock on order, May 10

$3,100

Planned BOM stock, June 1

$17,800

Planned sales for May

$3,500

Actual sales as of May 10

$1,200

Planned markdowns for May

3%

Actual markdowns as of May 10

$75

3. March figures for the misses’ dress department are as follows: Planned sales

$84,000

Planned markdowns

$2,400

Planned BOM stock

$187,000 Open-to-Buy and Assortment Planning

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Outstanding orders

$64,000

Planned EOM stock

$168,000

Planned markup %

49.5%

Calculate the OTB at retail and at cost.

4. Use the following information to determine the buyer’s OTB as of November 15: Planned sales for November

$80,000

Actual sales, November 1 to 15

$65,000

Stock on hand, November 15

$100,000

Planned stock, December 1

$100,000

Planned markdowns

$6,000

Actual markdowns, November 1 to 15

$2,800

Stock on order, November 15

$20,000

5. On June 1, a buyer had an inventory of $50,000 and a planned EOM stock of $60,000. As of June 1, the buyer had merchandise on order of $25,000 at retail to be delivered during the month. Planned markdowns for the month were $3,800 and planned sales were $40,000. The planned initial markup was 52%. Find the buyer’s OTB for the month at retail and at cost.

6. Determine the buyer’s OTB as of September 10 on the basis of the following information: (Use RIM to work the problem.) Planned sales for September

$54,000

Actual sales, September 1 to 10

$18,000

Planned markdowns

$4,500

Actual markdowns, September 1 to 10

$1,500

BOM stock, September 1

$126,000

Planned EOM stock

$120,000

Purchases received, September 1 to 10

$25,000

Stock on order, September 1 to 10

$10,000

Assortment Planning A tool used in balancing the merchandise assortment with customer demand is assortment or unit planning. The most basic type of planning is dollar planning as in determining OTB. However, in most merchandise classifications it is desirable to supplement dollar planning with assortment or unit planning. OTB indicates the dollar amount to be spent on goods while the assortment plan indicates the amount and type of goods to be purchased with the available dollars. 262

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Frequently, the inventory gets out of balance with customer demand. For example, with apparel, slow-selling sizes or colors may accumulate, creating a situation in which the dollar inventory appears adequate, but sales are lost because of lack of inventory in desired sizes or colors. The first step in developing an assortment plan is to identify the selection factors (also called parameters) that are most important to the customer. Selection factors, the qualities inherent in merchandise that differentiate one item from another, provide the basis for the customer’s buying behavior. For clothing, size is an important selection factor. Color, price, brand, fabrication, detailing, and styling also may be important selection factors, depending on the individual item or merchandise classification. Selection factors are characteristics that differentiate one item from another and, consequently, provide the basis for customers selecting or requesting the item. An assortment plan is a projection of the variety and quantity of merchandise to be carried to meet customer demand. The plan allocates the dollars or units to selection factors considered most important for the product. Assortment plans may be developed in two ways: (1) via the basic stock list and (2) by means of the model stock plan. A basic stock list consists of the items and number of units that are to be continuously maintained in stock. A basic stock list is composed largely of staple items and is specific. Included in the basic stock list is the name of the item, the brand, a physical description of the item, the cost and retail price of the item, and other information that identifies the merchandise precisely. A model stock plan is used by buyers of fashion goods and provides an assortment of stock, broken down according to identifiable selection factors. The model stock plan may include some staples, but is largely composed of fashion goods and is less specific than the basic stock list. It may include such information as classification, cost, retail price, brand, color, size, and fabrication. The inclusion of fashion and seasonal goods adds an element of unpredictability to the model stock plan. In working with assortment plans, it is important to recognize the differences between basic and fashion merchandise. Fashion goods are distinctive items of merchandise possessing strong customer demand over a short period, usually a season or less. Fashion goods are often purchased on impulse. Customer demand for fashion goods may end quickly, causing the buyer to take deep markdowns in order to the sell the merchandise. Fashion products have a shorter life span than basic goods, and sales are less predictable. Basic merchandise has a longer life span than fashion merchandise; therefore, it is easier for the buyer to plan purchases and predict sales of basic items. Basics include items that customers buy over a time that may extend many seasons. Basics are items that are continually desired by customers and should be maintained in stock by the buyer at all times. There are thousands of basic items, even in apparel. For example, certain styles in men’s underwear, socks, and dress shirts remain constant for several seasons or even years. There are different types of basic merchandise. Some basics rarely change, whereas others may last only a few seasons. Basics are also found among seasonal merchandise, and some retailers make a distinction between staple basics and fashion basics: Staple basics are items that rarely change and are maintained in stock for several seasons or even years. Basic staples are found in hosiery and underwear items for men, women, and children. Stationery and hardware items provide many examples of basic staples that rarely change from year to year. Fashion basics are items that sell throughout an entire planning period and beyond. Men’s dress shirts are an example. Colors may change, but the style often remains the same. Seasonal basics are products that customers desire only during certain times of the year. Demand for these goods is, however, consistent from year to year. Certain Christmas ornaments are an example. Basic merchandise does not provide excitement for a department; however, it should always be maintained in stock because it provides the bread and butter for a retailer. In addition, basic merchandise usually has a high gross margin rate, due to the fact that it rarely gets a markdown. Customers expect to be able to buy basic merchandise when needed. Customer loyalty is lost quickly by the retail firm that does not maintain basic items in stock. Open-to-Buy and Assortment Planning

263

Planning and control are essential for purchasing both fashion and basic merchandise. Fashion merchandise must be reviewed frequently to evaluate sales and make price adjustments. Planning to buy basic merchandise is accomplished by reviewing past sales records and analyzing sales trends.

Preparing the Assortment Plan Dollar plans must be translated into the unit assortment or model stock plan. Merchandise assortments must be balanced to meet customer demand and must remain within the financial constraints of the dollar merchandise plan. The result of an assortment plan is a model stock that provides a picture of the perfect amount of stock needed on hand to meet customer demand. The stock offers the appropriate assortment for the retailer’s customer. The buyer must consider current trends, previous sales, and goals in developing the model stock plan. The buyer must also consider the amount of floor space and the types and number of fixtures. It must be remembered that the plan is only a guide, because customer demand will vary during a selling season. Adjustments should be made in the plan as the selling season progresses. The buyer must constantly evaluate the plan and adjust reorders accordingly. The first step in completing the assortment plan is to determine the budget for purchases of merchandise during the planning period. After determining the budget, the buyer can prepare an assortment plan by following these steps: Step 1: Determine the merchandise classifications to be carried, and divide these classifications into appropriate subclassifications. Classifications break down merchandise into categories or classes that are groups of items similar in nature or in end use. Classifications are developed in direct response to the needs of a retailer’s customers and change little from year to year. Classifications remain constant while the merchandise within each classification changes. The purpose of classifications is to provide a basic statistical structure to facilitate merchandise control. Each subclassification is allocated a percentage value based on 100%. Examples of broad apparel classifications are men’s tailored clothing and men’s furnishings. Men’s tailored clothing can be broken down into subclassifcations such as suits, sport coats, dress slacks, topcoats, and raincoats. Men’s furnishings can be divided into subclassifications such as dress shirts, sport shirts, sweaters, neckwear, underwear, hosiery, belts, and small leather goods. In large retail firms, a buyer may be responsible for purchasing a narrow merchandise classification such as dress shirts or for purchasing a single brand name. In this type of structure, it is important that the merchandise manager ensure that the purchases coordinate with each other, on the one hand, or not overlap extensively, on the other. For instance, the ties that one buyer purchases must coordinate with the dress shirts that another buyer selects. Step 2: Determine brands and price lines to be carried for each subclassification. The ratio of private label to national brand names must be determined, as must the price range and important price lines. (Refer to Chapter 6 to review discussion on price range and price lines.) Step 3: Identify the general characteristics (selection factors) of an item that customers would consider when making a purchase. The precise information varies with the product, but includes information such as size, color, fabrication, detailing, and styles. For example, a men’s furnishings department might plan dress shirts by size, sleeve length, cuff style, color, fabrication (cottons and blends), and collar style. All of the important selection factors for the merchandise must be taken into consideration. Step 4: Determine the ratio of one classification to another and the proportion in which each selection factor will be represented in the stock. Some sizes, colors, and other factors will be more important than others. Past sales patterns and current trends will serve as a guide in determining the percentages of each factor to be carried. Step 5: Calculate the specific number of units to purchase for each merchandise classification and subclassification in the plan. Figure 9-1 shows the beginning of an assortment plan. In this figure, the toys classification is subclassified into dolls, vehicles, games, plush, and other. Each subclassification would be subdivided by brands such as 264

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TOYS Planned Purchases at Cost = Subclasss

$18,751.00 Brand

Color

Price

% of Subclass Dolls

Subclassification

$

27%

$5,062.77

Brand

% of brand

Barbies

26%

$

Color

$1,316.32 Fair

% of color 30%

$

Retail Price % of items

Open-to-Buy and Assortment Planning

Vehicles

15%

$2,812.65

Games

24%

$4,500.24

Plush

19%

$3,562.69

Other

15%

$2,812.65

FIGURE 9-1 Example of assortment planning.

22%

$1,113.81

Disney

18%

$ 911.30

Wamer

17%

$860.67

GI Joe

14%

$708.79

Other

3%

$151.88

Unit Cost

$394.90 $20.00

Cabbage Patch

$

# of units to be purchased

Medium

30%

$394.90

Dark

30%

$395

Other

10%

$132

20%

$78.98

$9.00

8.8

$30.00

70%

$276.43 $14.00

19.7

$90.00

10%

$39.49 $40.00

1.0

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Barbies, Cabbage Patch, Disney, and so on. Each brand of dolls would then be further divided by complexion such as fair, medium, dark, or other. Lastly, each product would be sorted by price point, in this example $20, $30, and $90. Reviewing the unit cost of the product as described, the number of units to be purchased can be determined by dividing the amount at cost for the products by the projected unit cost. For example, if the buyer has $78.98 to spend on fair Barbie dolls that will retail at $20 and the buyer’s cost is approximately $9.00, the buyer can purchase 8.8 units. In this case, the buyer will also need to determine if eight or nine units should be purchased. The number of units actually purchased will also depend on the means through which the supplier sells the product such as by individual item or case lot. Computerized planning systems have made the process of developing assortment plans more precise and have facilitated the planning of assortments by individual stock-keeping unit, or SKU. The SKU is the smallest unit for which sales and stock records are kept. It is a numeric code containing all required identification of merchandise in abbreviated form. Every unique item of merchandise has its own SKU, which tells the retailer exactly what product is in inventory assuming products are correctly scanned or entered at checkout. Universal product codes, or UPCs, are barcodes that are widely used for tracking inventory. UPCs are often affixed to products, making tagging and scanning of products, as well as management of inventory easy.

Practice Problems • Exercise 9.2 1. Develop an assortment plan for the home linens department given that 45% of the merchandise is sheets, 35% is in comforters, and 20% is in accessories. In both the sheets and comforters categories, 20% are twin, 20% are full, 35% are queen, and 25% are king. Sheets are broken into two classifications white 30% and fashion colors 70% while comforters are either solid 35% or patterned 65%. Accessories include throw pillows, 35%; dust ruffles, 35%; and throws, 30%.

2. The junior’s department carries 20% dresses, 10% shorts and capris, 35% tops and sweaters; 15% pants and jeans; 5% skirts, 10% jackets; and 5% swimwear. Each are carried in five sizes: XS, 10%; S, 25%; M, 30%; L, 25%; and XL, 10%. Each is also carried in three price zones: low, 25%; moderate, 45%; and high, 30%. Show this as an assortment plan.

3. Using the figures in problem 2, (a) determine the dollar amount to be spent on tops and sweaters in size medium in the low price zone if the planned purchases for juniors totals $100,000 and (b) determine how many units can be purchased if the items average $15.

4. Consider a department that carries junior’s jeans and develop an assortment plan including five brands each with three styles in seven sizes. Distribute the percentage of merchandise for the assortment plan.

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Inventory Replenishment Buyers must make decisions as to the most appropriate technique for maintaining an adequate stock. Retailers use sales curves to maximize sales, turnover, and profit. (Refer to discussion on sales curves in Chapter 8.) Sales curves are also one tool the buyer uses to estimate sales and determine how many of an item to buy and when to buy it. Buyers often refer to sales curves when adjusting buying plans, thereby having the merchandise that customers want when they want it. The buyer is able to maintain a lower inventory level while at the same time having the items the customer wants to purchase. This approach ensures a higher turnover, which generates more profit. Because the retailer will have fewer out-of-stocks when the customer wants the merchandise, sales volume will increase. Increased sales volume in turn generates more gross profit. In addition, since the buyer will not be overstocked with merchandise the customer does not want, markdowns should be lower, resulting in more gross profit. For fashion items, the buyer must carefully watch sales trends, particularly according to selection factors, and select merchandise in accordance with the assortment plan. For basic items, one technique is to have the merchandise on hand counted and reordered at regularly scheduled, periodic intervals. This strategy allows the store to guide the flow of merchandise, balancing customer purchases with reorders. When basics are to be counted regularly, a periodic inventory spreadsheet facilitates maintaining the system. Periodic count spreadsheets may be set up in several ways. A few manufacturers—cosmetic firms, for example— supply their retail accounts with forms that are specially designed for control of their merchandise. However, most retailers design their own periodic count forms. (See Figure 9-2 for an example.) Unit OTB (reorder quantity) can be calculated at any time from the following information: The reorder period (RP) is the period, in weeks, between planned stock counts. A reorder will be placed after each stock count. The delivery period (DP) is the period, in weeks, between the count and the date the reordered merchandise is on the selling floor.

PERIODIC REORDER FORM Department: Department No: Buyer:

Line: ITEM: Prices:

General cosmetics # 23 E. L. Jones Date

Item/ Color Hand lotion

Reserve quantity

36 24 15

Size 10 oz. 16 oz. 24 oz.

Maximum quantity

144 124 72

OH 71

O 73

Soft as silk Beauty care items $2.98 to $7.98

Date R* 72* * *

S 61

OH 82

O 62

Date

Date R* 72* * *

S 89

OH 65

O 79

R* 84 * * *

S

OH

O

R*

S * * *

* Check packaging considerations. Note: OH On hand O Quantity ordered (needed in order to reach maximum) R* Quantity received S Sales

FIGURE 9-2 Form used for periodic reorders. Open-to-Buy and Assortment Planning

267

Lead time (LT) is the sum of the reorder and delivery periods. Rate of sale (RS) is the average number of units sold per week. Reserve (R) is a quantity of merchandise to be maintained on hand to cover increases in sales or delays of reorders. Merchandise on hand (OH) is the amount of stock available, in units. Merchandise on order (OO) is the number of units of merchandise ordered, but not yet received. The maximum (also called the provision) quantity (M) is the order-up-to-quantity. It is the quantity to be made available—the quantity on hand plus any that are on order—at any reorder point. The maximum quantity is never on hand at any one time. Following is the formula for calculating maximum quantity: Maximum ⴝ Rate of Sale (Reorder Period ⴙ Delivery Period ) ⴙ Reserve Since reorder period + delivery period = lead time, the formula can also be written as Maximum ⴝ Rate of Sale (Lead Time) ⴙ Reserve Let’s review: RP is the number of weeks in a reorder period. DP is the number of weeks in a delivery period. LT is the number of weeks included in lead time. RS is the average number of units sold per week. R is the number of units to be maintained for reserve. OH is merchandise on hand. OO is merchandise on order. M is the maximum amount of stock needed to be available at any given time.

Example 9-4 The notions buyer inventories hair-care items every four weeks. A local wholesaler provides one-week delivery service. Brand X hair spray sells at an average rate of 30 cans per week. The reserve has been set at 48. Calculate the maximum (the order-up-to-quantity). Solution: Maximum = Rate of Sale (Reorder Period + Delivery Period) + Reserve = 30(4 + 1) + 48 = 30(5) + 48 = 150 + 48 = 198 The quantity that should be reordered (OTB) can be calculated by subtracting the amounts on hand and on order from the maximum quantity. OTB ⴝ Maximum ⴚ (Merchandise on Hand ⴙ Merchandise on Order)

Example 9-5 Using the previous example, if there were 75 cans of hair spray on hand, calculate the number that should be reordered (the OTB).

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Solution: OTB = Maximum - (Merchandise on Hand + Merchandise on Order) = 180 - (75 + 0) = 123 In most instances, a reorder will have been received prior to the next inventory, so the quantity on order (OO) will be zero; however, if merchandise is on order, it is important to allow for that quantity.

Example 9-6 The buyer for bedding has determined that beige, cotton/polyester, queen-size sheets sell at an average rate of 5 per week. The buyer plans to reorder every six weeks and delivery takes two weeks. The reserve quantity has been set at 16. If there are 23 sheets on hand and none on order, how many should be reordered? Solution: Maximum = Rate of Sale (Reorder Period + Delivery Period) + Reserve = 5(6 + 2) + 16 = 40 + 16 = 56 OTB = Maximum - (Merchandise on Hand + Merchandise on Order) = 56 - (23 + 0) = 33 The reorder period (RP) and rate of sale (RS) can be calculated from information shown on the periodic count form. The reorder period is the time between counts.

Example 9-7 An item was inventoried on October 1 and again on October 29. Find the reorder period. Solution: Reorder Period = Number of Days between Stock Counts , Number of Days in a Week = 28 days , 7 days a week = 4 weeks The following formula can be used to calculate the weekly rate of sale (RS): Rate of Sale ⴝ

Beginning Inventory ⴙ Receipts ⴚ Ending Inventory Reorder Period

Example 9-8 On October 1, an inventory showed 68 pairs of medium knee-hi hose in suntan on hand. At that time, 36 pairs were reordered; the reorder was received and put in stock. Now, on October 29, there are 56 pairs on hand. What was the rate of sale from October 1 to October 29? (Hint: Refer to the previous example for the reorder period.) Solution: Rate of Sale = =

Beginning Inventory + Receipts - Ending Inventory Reorder Period 68 + 36 - 56 4

= 12 units sold, on average, per week Open-to-Buy and Assortment Planning

269

Example 9-9 On November 2, there were 98 bottles of hand lotion on hand. At that time, 48 were reordered; the reorder has been received. Now, on November 23, there are 83 bottles on hand. Delivery requires two weeks. If reserve has been set at 36, how many should be reordered? (Hint: Break the problem into steps. Since the reorder period and rate of sale are not given, calculate both from the information presented.) Solution: Step 1: Determine the reorder period (RP). The first count was on November 2; the next count was on November 23, or 21 days later. Thus, RP =

21 days = 3 weeks 7 days per week

Step 2: Determine the rate of sale (RS): Rate of Sale = =

Beginning Inventory + Receipts - Ending Inventory Reorder Period 98 + 48 - 83 = 21 units sold on average per week 3

Step 3: Calculate the maximum (M): Maximum = Rate of Sale (Reorder Period + Delivery Period) + Reserve = 21(3 + 2) + 36 = 141 Step 4: Calculate the reorder quantity (OTB): OTB = Maximum - (On Hand + On Order) = 141 - (83 + 0) = 58* Note: *Small items such as hand lotion will be prepackaged with a specific quantity per carton. If this item is packaged with 2 1>2 dozen (30) bottles per carton, 2 cartons, or 60 units, will be ordered.

Example 9-10 A buyer estimates that a reserve of 40 sweaters in the $30 price line is needed. He plans to reorder stock every two weeks. It takes one week for delivery after an order has been placed. There are 50 sweaters in stock and 12 on order. Sales are estimated at 20 per week. Calculate the unit OTB, average stock, and unit turnover/year. Solution: Step 1: Calculate the provision (P). This is also called the maximum quantity. Provision = Rate of Sale (Reorder Period + Delivery Period) + Reserve = 20(2 + 1) + 40 = 100 Step 2: Determine OTB: OTB = Provision - (Merchandise on Hand + Merchandise on Order) = 100 - (50 + 12) = 38 Step 3: Calculate the average stock: Average Stock = Reserve + 1>2 (Rate of Sale * Reorder Period) = 40 + 1>2 (20 * 2) = 40 + 20 = 60 270

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Step 4: Calculate turnover (unless otherwise specified, turnover is calculated for a year): Net Sales = Rate of Sale * 52 Weeks per Year = 20 * 52 weeks = 1,040 units Turnover = Net Sales (in units) , Average Stock = 1,040 , 60 = 17.33 Some stores use this periodic fill-in technique to maintain their assortment or “groups of merchandise.” Items that are similar may be considered as a “basic unit.” A general type of sport shirt, such as plaid, short sleeve, or a cotton/polyester blend, could be treated as one unit and as merchandise ordered from more than one vendor. Another example of merchandise that might be handled as a staple unit is white linen dinner napkins. Some basic merchandise has a relatively flat curve all year long, except for one or two peaks. For example, more men’s underwear is sold when children go back to school and at Christmas. It is important to know what percent of the annual sales volume these peaks represent so that additional merchandise can be purchased to meet the increased demand. The size of the reserve quantity will depend on the degree of protection desired against the possibility of running out of stock. Formulas can be used to calculate reserve quantities; however, most buyers estimate reserve quantities on the basis of experience or refer to tables.

Practice Problems • Exercise 9.3 1. On December 1, an inventory showed 50 pairs of white knee socks in stock and 30 pairs on order. The reorder was received and put in stock. On December 29, 40 pairs were on hand. Determine the rate of sale during the period.

2. A buyer for linens has 35 beige beach towels in stock. A reserve of 12 is maintained. Stock is reordered every five weeks and delivery requires one week. Sales average 10 per week. Determine the quantity that should be reordered.

3. The rate of sale of leather chairs is estimated at four per week. The buyer places orders every five weeks and delivery takes six weeks. A reserve equal to two-weeks’ estimated sales is maintained. There are 20 leather chairs on hand and 15 on order. Calculate (a) the unit OTB and (b) the unit annual stock turnover.

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271

4. A buyer has 125 blouses in her $40 price line in stock and 60 on order. Sales are estimated at 20 per week. A reserve of 70 blouses is considered adequate. Stock is reordered every three weeks. It takes four weeks for delivery after an order has been placed. Calculate (a) the unit OTB, (b) the average stock, and (c) the unit annual stock turnover.

5. The buyer for the domestics department has 60 white towels in stock and 50 on order. A reserve of 20 is maintained, and sales are estimated at 40 per week. Determine how many white towels the buyer is open to receiving if the reorder period is four weeks and the delivery period is two weeks.

Definitions Definitions

Assortment Plan – A projection of the variety and quantity of merchandise to be carried in a department or store to meet customer demand. Amounts may be stated in dollars or in units. Assortment plans may be developed either through the basic stock list method or the model stock plan. Basics – The assortment of merchandise that should be maintained at all times. This merchandise consists of staples that have a highly predictable sales rate because customer demand for such merchandise remains relatively consistent. Basic Stock List – A method for developing an assortment plan used for staple items. Included in the basic stock list are the name of the item, the brand, a physical description of the item, the cost and retail price of the item, and other information that identifies the merchandise precisely. A basic stock list is more specific than a model stock plan. Fashion Basics – Items that sell throughout the entire planning period and, with minor changes, may sell for more than one season. Fashion Goods – Distinctive goods possessing considerable current customer appeal. Such goods have a short product life span and an unpredictable level of sales. Maximum Quantity – The quantity of goods (on hand plus on order) to be made available at any reorder point. Also called the provision quantity. Model Stock Plan – A method for developing the assortment plan used in planning fashion merchandise. Although the model stock plan breaks down the composition of the stock according to

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identifiable selection factors such as fabric, color, size, and classification, it is less specific than the basic stock list. Open-to-Buy (OTB) – Also called Open-to-Receive, this is the amount of merchandise that a buyer may order during the balance of a given period, usually one month. OTB may be calculated in dollars or units of merchandise. Rate of Sale – The average number of units of merchandise sold per week. Reserve – The quantity of merchandise to be kept on hand to protect against items becoming out of stock due to unexpected increases in sales or delivery time. SKU (stock-keeping unit) – The smallest unit for which sales and stock records are kept. Seasonal Basics – Products that customers desire only at certain times of the year. Demand for these products remains consistent from year to year. Selection Factors – Qualities inherent in merchandise that differentiate one item from another and provide the basis for the customer’s buying behavior. Staple Basics – Items that rarely change and are maintained in the assortment for several seasons. Unit Planning – A tool used in balancing the assortment of merchandise with customer demand in terms of individual merchandise units rather than dollar value. UPC (universal product code) – Barcodes signifying product qualities that are widely used for tracking inventory.

Summary Problems Chapter 9 • Summary Problems

1. A buyer had an inventory of $45,000 on June 1 and a planned EOM stock of $51,000. Planned sales for the department were

$39,000 and planned markdowns for the month were $3,200. As of June 1, the buyer had merchandise on order of $10,000 at retail to be delivered during the month. Planned initial markup was 48%. Calculate the buyer’s OTB at retail and at cost as of June 1.

2. Given the following figures, determine the OTB as of October 10: Retail stock on hand, October 10

$22,000

Merchandise on order

$6,200

Planned BOM stock, November 1

$24,000

Planned sales for October

$9,500

Actual sales as of October 10

$3,500

Planned markdowns for October

$380

Actual markdowns as of October 10

$200

3. The children’s department had the following figures for October: Planned sales

$500,000

Planned reductions

$5,000

Planned stock, October 1

$850,000

Planned stock, November 1

$630,000

Outstanding orders

$200,000

Planned markup

48.2%

(a) Determine the planned October purchases at retail for the children’s department. (b) What is the October OTB at cost?

4. Calculate the OTB as of April 10, given the following information: Planned sales, April 1 to 30

$57,000

Actual sales, April 1 to 10

$25,000

Merchandise on hand, April 10

$75,000

Planned stock, May 1

$64,000

Planned markdowns

$3,500

Actual markdowns, April 1 to 10

$1,500

Merchandise on order, April 10

$12,000

Open-to-Buy and Assortment Planning

273

5. Develop an assortment plan for the handbags and accessories departments given that 67% of the goods are handbags (average price $40), 25% are wallets (average price $25), and 8% are keychains (average price $10). Of the handbags, 65% are shoulder bags, 16% are totes, 9% are satchels, 6% are backpacks, and 4% are clutches. Of the wallets, 55% are checkbook wallets, 15% are coin wallets, and 30% are wristlets. Given planned purchases at $25,000, determine how many handbags, wallets, and keychains of each style should be ordered.

6. A buyer maintains a reserve of 35 toasters. She has 30 toasters in stock and 24 on order. She plans to reorder every two weeks and delivery takes one week. Sales average 20 per week. Calculate the unit OTB.

7. On the first of the month, an inventory showed 30 pairs of men’s black executive-length socks in stock and 48 pairs on order. The reorder was received and put in stock. On the 29th day of the month, 26 pairs were on hand. Determine the rate of sale from the 1st of the month to the 29th of the month.

8. The rate of sale for a patio furniture set is estimated at five per week. The buyer places orders every four weeks, and delivery takes six weeks. A reserve equal to two-weeks’ sales is maintained. If there are 15 sets on hand and 15 on order, what is the unit open-to-buy?

9. On June 1, there were 54 bottles of hand lotion on hand. At that time, 48 were reordered. The order has been received. Now, on June 22, there are 51 bottles on hand. Delivery requires two weeks. If the reserve is 36, how many should be reordered?

10. A buyer has 90 pairs of jeans in his $25 price line in stock and 24 on order. Sales are estimated at 30 per week. A reserve of 60 is maintained and stock is reordered every three weeks. It takes four weeks for delivery. Calculate (a) the unit OTB and (b) the stock turnover.

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chapter 9

Case Study 1 Improving Performance in Children’s Accessories Irene Foster, Ph.D Framingham State University After graduating from college, Melissa Malone landed a position with Orchard Creek, one of the finest children’s boutiques in the Boston area. Three years ago, Melissa was promoted to Assistant Buyer. Among her other responsibilities, Melissa is now the sole buyer for the Children’s Accessories Department. Orchard Creek has successfully been selling children’s clothing for over 25 years. Its merchandise assortment includes classic children’s clothing, fashionable accessories, and unique gift items for infants, toddlers, boys, and girls. Employees take great pride in the store. The boutique, well known for its merchandise quality and exceptional customer service, has received many awards, including the “Readers’ Choice Award” and “Top Pick” for Best Children’s Clothing from local newspapers as well as a regional magazine. This fall, however, the Children’s Accessory Department is falling short of meeting its sales goal. During an October meeting with the department sales manager, the merchandise manager, and the advertising manager, Melissa was directed to examine her department’s performance. Within two days, Melissa must analyze the performance of the Children’s Accessories Department, compare it with the department’s six month plan, calculate the department’s open-to-buy for the remainder of October, and identify feasible options for getting the department back on track. Melissa reviewed her six-month plan for Orchard Creek’s Children’s Accessory Department, including the actual

performance for August and September. [See the attached spreadsheet.] She also observed the department’s current performance from October 1 through October 15. In her midmonth analysis, Melissa observed the following: • Actual sales from October 1 through October 15 were $3,529.00 • The value of merchandise on-order scheduled to arrive before the end of October is $2,749.00 • Actual markdowns taken from October 1 through October 15 were $715.00 • Stock on hand as of October 15 is valued at $22,160.00 DISCUSSION QUESTIONS FOR CASE STUDY 1

1. As of October 15, how is the Children’s Accessories Department performing compared with the department’s six-month plan?

2. What is the open-to-buy remaining for the month of October? 3. What immediate steps should Melissa take to improve her open-to-buy?

4. What additional information would Melissa want to review that would be helpful in making an informed decision?

5. What are at least two actions Melissa could propose to improve the sales performance of the Children’s Accessories Department?

Open-to-Buy and Assortment Planning

275

SIX-MONTH MERCHANDISING PLAN

Last Year % initial markup % reductions % maintained markup % alteration expense % cash discount % gross margin % operating expense % net profit season turnover average stock

Department Name: Children's Accessories Department Department Number: 600 Merchandise Manager: Buyer: Melissa Malone

61.32% 23.71% 52.15% 0.00% 0.00% 52.15% 44.90% 7.25% 2.68 $17,520

Plan

Actual

61.50% 22.60% 52.80% 0.00% 0.00% 52.80% 45.40% 7.40% 2.90 $17,007

Period: Fall

FALL SALES

EOM STOCK

REDUCTIONS

BOM STOCK

PLANNED PURCHASES AT RETAIL PLANNED PURCHASES AT COST

Last Year Plan Revised Actual $ Change % Change % of LY Sales % of Plan Sales Last Year Plan Revised Actual Last Year Plan Revised Actual $ Change % Change % of LY Reductions % of Plan Reductions Last Year Plan Revised Actual LY Stock Sales Ratio Plan Stock Sales Ratio Last Year Plan Revised Actual Last Year Plan Revised Actual

A U T H O R IZ A T IO N S IG N A T U R E S : Buyer Merchandise Manager Controller

276

chapter 9

$6,389 $6,412

$6,561 $6,905

$7,499 $7,891

$8,473 $8,878

$12,896 $13,810

$5,154 $5,425

SEASON TOTALS $46,972 $49,320

$5,883 $23 0.35% 13.60% 13.00% $15,883 $16,299

$6,005 $344 5.24% 13.97% 14.00% $16,853 $17,285

$392 5.23% 15.96% 16.00% $17,875 $18,272

$405 4.78% 18.04% 18.00% $22,765 $23,204

$914 7.08% 27.45% 28.00% $14,997 $14,819

$271 5.26% 10.97% 11.00% $18,273 $17,614

$2,348 5.00% 100.00% 100.00% $106,646 $107,493

$18,064 $2,119 $2,006

$20,389 $1,301 $1,338

$1,489 $1,560

$1,423 $1,338

$2,660 $2,675

$2,146 $2,229

$11,138 $11,146

$1,797 ($113) -5.32% 19.02% 18.00% $15,994 $15,806

$1,221 $37 2.81% 11.68% 12.00% $15,883 $16,299

$71 4.80% 13.37% 14.00% $16,853 $17,285

($85) -6.01% 12.78% 12.00% $17,875 $18,272

$15 0.57% 23.88% 24.00% $22,765 $23,204

$83 3.88% 19.27% 20.00% $14,997 $14,819

$8 0.07% 100.00% 100.00% $104,367 $105,685

$16,979 2.50 2.47 $8,397 $8,911

$18,064 2.42 2.36 $8,832 $9,228

$20,389 2.25 2.19 $10,010 $10,439

2.11 2.06 $14,786 $15,147

1.77 1.68 $7,788 $8,100

2.91 2.73 $10,576 $10,450

$60,389 $62,274

$3,248 $3,431

$3,416 $3,553

$3,872 $4,019

$5,719 $5,832

$3,012 $3,118

$4,091 $4,023

$23,358 $23,975

August

September

October

November

December

January

A U T H O R IZ A T IO N D A T E :

Case Study 2 “It Takes a Village” (and maybe better assortment planning!) Rochelle Brunson, Ph.D Baylor University As Hannah looked around her store, The Village, she wondered what would be the most efficient and productive method for reordering merchandise for the bridal registry section of the store. This area of the store took up almost 75% of the 2,400 square feet of total selling space of her store. The other 25% of the store consisted of gifts (photo frames, porcelain figurines, graduation gifts, linen tablecloths, placements, napkins, and greeting cards). Ten years earlier, Hannah had opened The Village in hopes that it would become “the” place locally for brides and grooms to register their fine china, everyday dinnerware, crystal, and stainless flatware patterns. Having lived in this city of about 200,000 for 14 years prior to opening the store, Hannah felt she understood the culture of the area as well as the shopping habits of most women. She worked for various retailers in the area while going to college and noticed that many of the female shoppers (especially the 40 year and above age group) expected a high level of customer service. For example, when women were invited to a bridal shower, they wanted the gift they purchased to actually be displayed at the shower as opposed to giving a gift card or gift certificate stating that it was on order and would be delivered to the bride at a later date. The women in the area were quite particular about this gift-giving aspect. She wrote a business plan for this store in one of her college courses and believed she could break even within the first seven to eight years of opening this bridal registry business. For years, she had heard her mother and other women talk about their “silver pattern” and their “fine china” and how they had registered for it at some of the larger department and specialty stores in bigger cities. There were not any large department stores that carried china, crystal, or silver in the city where she planned on opening her store, so it seemed she would be drawing from a fairly untapped market. At the time Hannah opened her store 10 years earlier, her market research showed there were only three other competitors within a 60 mile radius. One business was initially an apparel store for the wedding party and carried merchandise such as bridesmaid dresses, mother of the bride/ groom dresses, as well as wedding gowns. That particular competitor’s designated selling space for the bridal registry

was around 500 square feet. Another competitor was a florist who already had a strong clientele in the area and decided to expand its offerings to include a bridal registry. The expansion allowed them to have almost 950 square feet of selling space for the registry area. The last competitor had been a jewelry store for almost 30 years and felt they should expand and include a bridal registry since many brides and grooms were already shopping at their store looking for engagement and wedding rings. The selling space allocated for their bridal registry was about 700 square feet. By far, The Village had the largest square footage allocated for the bridal registry area of any of the other competitors. For the first 10 years since the opening of The Village, the store had done remarkably well. The business plan Hannah wrote in college had shown the store could break even in seven to eight years. In fact, the store broke even in its first five years and had continued to grow an average of 25% each year for the next three years. However, the store experienced no growth in sales from the eighth year and had even begun to lose sales (about 10% in the 10th year). Following the eighth year in business, several different occurrences took place which Hannah believed had caused the decrease in business. First, a large department store chain opened a new store within 12 miles of Hannah’s store. Second, many big box retailers and department stores were allowing the bride and groom to register items in the store and then make those selections available online. Since using the Internet for shopping was becoming more popular, guests living out of town found it convenient to purchase a gift for the bride and groom and even have it delivered. Hannah had a Web site for The Village that provided store information, but it did not allow any orders to be placed from the site. Another trend Hannah began to notice pertained to both the place and the type of merchandise they registered. In the past, brides and grooms would invariably register with one of the smaller stores’ bridal registries in town and would register silver, fine china, and crystal patterns. The trend tended to be moving toward registering at retailers such as Target; Bed, Bath & Beyond; and home improvement stores such as Lowes and Home Depot. Moreover, these new couples were

Open-to-Buy and Assortment Planning

277

registering for less expensive, casual styles of dinnerware, flatware, and glassware at Target and Bed, Bath & Beyond. In fact, one competitor (the jewelry store) had discontinued its bridal registry due to decreased business in the area. All of these recent occurrences had caused Hannah and her team of five employees to reexamine and reevaluate how the buying and assortment planning had previously been done. In the past, the buying tended to revolve around a large assortment (both in breadth and depth) of fine china and many of the stainless flatware patterns. Hannah believed the store should carry as many sample place settings as possible in order to represent as many of the brands and styles of china and flatware as possible. Some of the brands of china included Royal Doulton, Mikasa, Villeroy & Bach, Wedgwood, Lenox, Noritake, and Spode. The top sellers in china had always been Wedgwood, Lenox, Royal Doulton, and Noritake. Although the store carried Gorham flatware, it was by far Oneida that most of the brides registered. The brands of crystal that had been carried in the store since it opened were Gorham and Waterford. Hannah had noticed it was getting harder to compete with the larger department stores that carried Waterford crystal due to their increased buying power, which usually equated to lower prices. She wondered if they shouldn’t drop the number of patterns stocked of Waterford crystal within the store. The sales for the past three years were as follows: eighth year in business – $600,000; ninth year in business – $585,000; and the 10th year – $526,000. The annual budget for buying merchandise for the entire store during the past three years had averaged $310,000 with 75% spent on product for the bridal registry area. The markup for the china, flatware, and crystal area was 50% (retail markup method). Within the 75% of what had been bought each year for the bridal registry area, the merchandise mix was broken down according to the following: Fine China

278

–50%

Royal Doulton

–9%

Mikasa

–5%

chapter 9

Villeroy & Bach

–2%

Wedgwood

–10%

Lenox

–12%

Noritake

–9%

Spode

–3%

Stainless Flatware

–15%

Oneida

–12%

Gorham

–3%

Crystal Glassware

–10%

Gorham

–8%

Waterford

–2%

As Hannah thought about the future of the store, she knew she would need to change the buying, assortment planning, as well as the merchandising of the store in the past if she was going to not only remain competitive but also stay in business. DISCUSSION QUESTIONS FOR CASE STUDY 2

1. Do a SWOT analysis on The Village retail store. 2. How can Hannah’s store compete in this changing marketplace?

3. Based on the average annual merchandise budget of $310,000 for the entire store, break down the dollar amount for each merchandise category as well as each brand in the bridal registry segment of the store.

4. Based on the dollar amounts from question 3, what should be done with the assortment planning that would enable the store to be more profitable?

5. If Hannah came to you and hired you as a retail consultant, what would your overall plan be for merchandise buying, assortment planning, pricing, and the use of social media/ Web site?

Case Study 3 You, as the Assistant Buyer! First Task: Open-to-Buy Control Jessica Hurst, Ph.D Iowa State University Congratulations! You have graduated from Alma Mater ­University and have landed your first job as an Assistant Buyer for Neiman Marcus. You will be working in Department 817: Men’s Knits and Wovens. In your buying office, the majority of the merchandise purchased each month would be considered basic stock or staple goods (i.e., short-sleeve knit polos, short/long-sleeve woven button-downs, etc.). Usually, the buyer secures her order for these goods at the beginning of the season. After the merchandise has been viewed at market for each season, she then uses history data to decide what amount of merchandise will be purchased for each month throughout the season. Then, the remaining OTB is typically used to purchase fashionrelated items that will complete the merchandise offering and provide the customers with a complete merchandise assortment for the duration of the season. Therefore, the buyer reminds you that OTB is important because it acts as a “budget watchdog” by ensuring that all purchases are carried out according to the figures designated in the six-month merchandise plan. In other words, it monitors the buyer’s purchasing activity by ensuring that only merchandise needed to fulfill the projected plan is purchased and that no extra merchandise is purchased in excess. Because OTB plays such a critical role in the completion of the six-month merchandise plan, you have been given the task of calculating the projected OTB for each month for the upcoming spring season, so that the buyer has an idea

of what OTB amount can be used to purchase these fashion items that the vendor offers each season. In an Excel file, you are given the six-month merchandise plan for spring. The buyer is planning on a 10% sales increase from last year, and has filled in the planned net sales to reflect this projected increase. She has also filled in the BOM and EOM inventory figures, purchases at retail and cost, and markdowns. In addition, based on her market preview of the spring line, along with history data, she has filled in the planned merchandise on order at retail. The only thing left for you to do is to calculate the OTB at retail and cost. Your buyer tells you that she mostly uses the OTB figures at retail; however, she does like to have the OTB at cost calculated as well. After you calculate the OTB at retail and OTB at cost figures, she has asked you to prepare a brief report. She has outlined five key questions for you to include in this report. You will discuss your calculations and report with her over breakfast tomorrow morning at 9 am (Sharp!) in the Café. Discussion QUESTIONS for Case Study 3 Using information in Case Study 3, calculate the dollar OTB at retail and cost available for each month. Then, answer the ­ following five discussion questions:

1. What month has the highest OTB? List the OTB dollar at retail.

2. Disregarding any negative OTB, which month has the lowest OTB at retail? List the OTB $ at retail.

3. List three reasons why a buyer should have some OTB dollars SPRING

LY (%)

PL (%)

47.20

47.27

Total markdowns %

6.80

6.00

Total shortage %

3.00

3.00

Initial markup %

Total sales discounts %

1.00

1.00

Total reductions

10.80

10.00

Maintained markon %

41.50

42.00

Operating expenses %

36.50

36.50

Operating profit %

5.00

5.50

Turnover

1.60

2.0

Projected sales increase

7.50

10

Note: LY = Last Year; PL = Planned This Year



Actual

available during the season.

4. a.  Is there any month where the buyer has a negative OTB? If so, list the month and the OTB at retail. b. What does it mean when there is a negative OTB? c. Provide an explanation as to why the buyer has a n ­ egative OTB, or has overbought for this particular month. (Hint: Think about the TYPE of merchandise our department sells and the TIME of YEAR; are there any holidays or special events that typically take place during this time of the year?).

5. Discuss at least three ways to correct an overbought ­situation.

Open-to-Buy and Assortment Planning

279

280 chapter 9

SPRING Department 817: Men’s Knits and Woven’s Feb. (I) $

Mar. (II) %

$

Apr. (III)

%

$

May (IV)

%

$

June (V)

%

$

Juy (VI)

%

$

TOTAL %

$

Net Sales Last year

16,300

14.24

17,500

15.3

18,600

16.26

19,700

17.22

21,300

18.62

21,000

18.36

114,400

Plan

17,618

14.00

18,876

15.00

25,168

20.00

21,393

17.00

22,651

18.00

20,134

16.00

125,840

BOM Stock Last year

78,240

78,750

74,400

70,920

70,290

63,000

435,600

Plan

59,565

60,823

67,115

63,340

64,598

62,081

377,522

Last year

78,750

74,400

70,920

70,290

63,000

60,000

417,360

Plan

60,823

67,115

63,340

64,598

62,081

62,920

380,878

EOM Stock

Markdowns Last year

778

10

934

12

1,167

15

1,556

20

1,711

22

1,711

22

7,779

Plan

831

11

755

10

1,284

17

1,510

20

1,510

20

1,661

22

7,550

Purchases at Retail Last year

17,588

14,084

16,287

20,626

15,721

19,711

108,515

Plan

19,707

25,923

22,676

24,161

21,644

22,634

136,746

9,286

7,436

8,599

10,890

8,301

10,408

54,921

10,391

13,669

11,957

12,740

11,413

11,935

72,106

15,000

20,000

19,500

25,000

14,500

17,000

111,000

—

—

—

—

—

—

—

—

—

—

—

—

—

—

Purchases at Cost Last year Plan On-order at Retail Plan Open-to-Buy at Retail Plan Open-to-Buy at Cost Plan

appendix A Review of Fractions Fractions are values less than 1. The fraction 1>4 means one of four parts. For example, 1>4 of $1.00 is $.25. The fraction 3>4 means three parts, each of which is equal to 1>4. The number on top is called the numerator and the number on the bottom is called the denominator. 3 = numerator 4 = denomintor Fractions are closely related to decimals and percents. Decimals are similar to fractions because they represent part of a whole quantity. Working with percents is another method of working with fractional parts; percents are fractions with a denominator of 100.

Common Denominators Working some fraction problems requires finding a common denominator, which simply means changing all the fractions in the problem to fractions with the same denominator. To do this, find a number (the common denominator) that is divisible by all the denominators in the problem. Sometimes it is easier to multiply several of the denominators by each other to find a common denominator. For example, the fractions 2>5 and 3>4 can be converted to fractions with a common denominator of 20(5 * 4). Converting fractions into different, yet equivalent, fractions that have a common denominator is simply a matter of multiplying both the numerator and denominator by the same number. For example, to transform 2>5 into a fraction with a denominator of 20, divide the denominator 5 into the desired denominator 20(20 , 5 = 4). Then, use 4 as the multiplier for both the numerator and the denominator. The numerator becomes 8(4 * 2) and the denominator 20(5 * 4 = 20), resulting in the fraction 8>20. The two fractions 2>5 and 8>20 are equivalent. Similarly, 3>4 can be converted by dividing 4, the existing denominator, into the desired denominator, 20(20 , 4 = 5). Use 5 to multiply by the numerator to finish the conversion (5 * 3 = 15). The new fraction is

15> . 20

and

Now the fractions 2>5 and 3>4 can be added or subtracted by using the new, converted forms of 8>20

15> . 20

Example 1 Convert the fractions 1>4, 1>3 and 1>6 into fractions with a common denominator. Solution: Multiply the denominators together until a number is found that is evenly divisible by all three denominators. Multiply two denominators (4 * 3 = 12). Twelve is evenly divisible by all three denominators, so it can become our common denominator. Divide each denominator into 12 to arrive at a new value that will be used as a multiplier of both the numerator and denominator. Convert the three fractions into equivalent fractions with a common denominator of 12.

281

12 , 4 = 3

Use 3 as the multiplier:

1> 4

* 3>4 = 3>12

12 , 3 = 4

Use 4 as the multiplier:

1> 3

* 4>4 = 4>12

12 , 6 = 2

Use 2 as the multiplier:

1> 6

* 2>2 = 2>12

Now the three fractions have the common denominator 12: 3> , 4> , 12 12

and 2>12

Reducing to Lowest Terms Reducing a fraction to its lowest terms means that both the numerator and the denominator cannot be further divided by a whole number. For example, 15> 20

15> 20

can be reduced by dividing the numerator and the denominator by the same number.

, 5>5 = 3>4. This does not change the value of the fraction. 5 into 15 = 3 5 into 20 = 4

(5 goes into each)

15 3 reduces to 20 4 Sometimes the answer will be an improper fraction—a fraction whose numerator is larger than its denominator. An improper fraction is reduced to lowest terms by dividing the denominator into the numerator.

Example 2 23> 20

is an improper fraction. 1 20 223 -20 3

23> 20

is reduced to 1 3>20 .

Adding Fractions When adding fractions, change the fractions so that each contains a common denominator, and then add the numerators and reduce to lowest terms. You may find it easier to add fractions vertically instead of horizontally.

Example 3 1>3 5>15

+ 2>5 + 1>5

=

+ 6>15 + 3>15 =

or

14> 15

1> 3

= 5>15

2>5

= 6>15

1>5

= 3>15 14>15

A mixed number is the combination of a whole number and a fraction, such as 4 1>2. Mixed numbers may be added by first adding the whole numbers and then adding the fractions.

282

appendix A

Example 4 Add the mixed numbers 4 1>2 + 2 1>2 . Step 1: Add the whole numbers: 4 + 2 = 6 Step 2: Add the fractions: 1>2 + 1>2 = 2>2 = 1 4 1>2 + 2 1>2 = 6 + 1 = 7

Another way to add mixed numbers is to convert the numbers into improper fractions and then add.

Example 5 4 1>2 = 9> 2

4 1>2 + 2 1>2 = 9> 2

+ 5>2 =

14> 2

+ 2 1>2 = 5>2

or

14>2

= 7

= 7

Subtracting Fractions Subtracting fractions is similar to adding them. First you must find a common denominator, and then you subtract the numerators and reduce the resulting fraction to lowest terms.

Example 6 3>4

- 1>2 =

6> 8

- 4>8 = 2>8

2>8

3>4

or

= 6>8

- 1>2 = 4>8

reduces to 1>4

2>8

= 1>4

Mixed numbers can be subtracted by first subtracting the whole numbers and then subtracting the fractions. Another method is to change the mixed numbers into fractions and then subtract.

Example 7 2 1>4 - 1 1>4 = 9> 4

- 5>4 = 4>4 = 1

Multiplying Fractions To multiply fractions, multiply the numerator of one fraction by the numerator of the other fraction(s) and the denominator of one fraction by the denominator of the other fraction(s). “Cancellation” (really, reduction to an equivalent fraction) can be used in some problems to simplify the multiplication, saving time and minimizing errors. This means that both numbers have common factors that can be equally reduced or canceled. After multiplying, reduce answers to lowest terms.

Example 8 >5 * 1>2 = 3>10

3

Review of Fractions

283

Example 9 2 1 * = 5 10 1

1 2 = * 5 10 5

1 1 1 * = 5 5 25

Example 10 To multiply mixed numbers, change the mixed numbers into improper fractions and then proceed as explained in Example 9. 2 1>2 * 1>3 = 5>2 * 1>3 = 5>6 To multiply a fraction by a whole number, change the whole number to a fraction by placing it as a numerator over 1. For instance, 4 is the same as 4>1. Thus, 4 * 3>4 = 4>1 * 3>4 = 12>4 = 3.

Example 11 Multiply the whole number 10 by 1>3. 10> 1

* 1>3 =

10> 3

reduces to 3 1>3

Dividing Fractions To divide fractions, invert the divisor and then proceed as in multiplication of fractions. Inverting a fraction means interchanging the places of the numerator and the denominator. For example, 3>4 is inverted to 4>3. To invert a whole number, be sure to change it to a fraction first by placing it over 1. For example, 6 is the same as 6>1, which can be inverted to 1>6.

Example 12 1

7 1 7 8 7 8 7 = = 7 , = * = * 1 1 8 8 8 1 8 1

3 3 2 1 3 3 , 2 = , = * = 4 4 1 4 2 8

Example 13 15 1>3 , 1 1>6 =

46> 3

, 7>6 =

46> 3 1

2

* 1 6>7 =

92> 7

= 13 1>7

Fractional Parts Sometimes a fractional amount of an item is purchased, such as 3>4 of a yard or 1>4 of a dozen. To find the amount of the purchase, multiply the fraction or mixed number by the price.

284

appendix A

Example 14 3> 4

3> 4

yard of fabric at $4.98 a yard.

* 4.98 =

14.94 = 3.735, rounded to $3.74 4

Before starting to solve a problem, think about (a) the degree of accuracy needed and (b) whether the problem is easier to solve with the use of fractions or decimals.

Example 15 21>3 yards of fabric at $6.00 a yard. Using fractions: 2 1>3 * $6 = 7>3 * 6>1 =

Using decimals: 14> 1

= $14.00

or

2.33 * $6.00

= $13.98 (incorrect)

2.333 * $6.00 = $14.00 Calculating the cost of merchandise requires a high degree of accuracy. The cost in the preceding example should be $14.00. If the problem is going to be solved with the use of decimals rather than fractions, it is important to use the decimal as 2.333 (correct to three decimal places).

Review of Fractions

285

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appendix B Selected Formulas Amount of Space =

Sales Volume Sales per Square Foot

Average Commission Earning per Hour =

Average Earnings per Hour = Average Stock = (a)

Total Commission Total Number of Hours Worked

Gross Earnings Total Number of Hours Worked

Net Sales for the Period Stock Turn for the Period also

(b)

BOM Stock for Each Month (in the period) + End@of@Period Stock Number of Months in Period + 1

Average Stock for the Season =

Sales for the Season Stock Turnover for the Season

Average Units per Transaction =

Gross Units Number of Transactions

Base =

Percentage Amount Percent

Book Inventory = Total Merchandise Handled - Total Retail Deductions Basic Stock = Average Inventory - Average Monthly Sales BOM Stock = (a) Planned Sales for Month * Planned Stock - Sales Ratio also (b) Planned Sales for Month + Basic Stock Closing Book Inventory = Total Merchandise Handled - Total Retail Deductions Commission = Net Sales * Commission % Contribution = Gross Margin - Direct Expenses Cost = Retail - Markup Cost of Closing Book Inventory =

Retail Value of Closing Book Inventory Cost %

Cost Complement % = Retail % - Markup %

287

Cumulative Markup % =

Customer Return % =

Total Merchandise Handled at Retail - Total Merchandise Handled at Cost Total Merchandise Handled at Retail

Customer Returns Gross Sales

Estimated Sales = Square Footage * Sales per Square Foot Estimated Shortage = Net Sales * Shortage % Estimated to Have Occurred Estimated Physical Inventory = Closing Book Inventory - Estimated Shortage Expense % = 

Expenses Net Sales

Gross Cost of Merchandise Sold = Cost of Total Merchandise Handled - Cost Value of Closing Inventory Gross Earnings = (Number of Hours Worked * Hourly Rate) + (Commission $) Gross Margin % = (a) Net Sales - Total Cost of Merchandise Sold also (b) Profit + Expenses also (c) Maintained Markup + Cash Discounts - Alteration Costs Gross Margin % =

GMROI =

Net Sales - Total Cost of Merchandise Sold Net Sales

Gross Margin Average Inventory at Cost

Gross Sales = Net Sales + Customer Returns Gross Wages = Number of Hours Worked * Hourly Pay Rate Initial Markup % =

Initial Retail Value of Merchandise - Cost Value of Merchandise Initial Retail Value of Merchandise Expenses + Profit + Reductions +

Initial Markup % Needed =

Maintained Markup % =

Alteration / Workroom Costs - Cash Discounts Net Sales + Reductions

Net Sales - Gross Cost of Merchandise Sold Net Sales

Markdown % for a Period =

Net Markdowns for the Period Net Sales for the Period

Markup = Retail - Cost

288

appendix B

Markup % Based on Cost =

Markup Cost

Markup % Based on Retail =

Markup Retail

Maximum / Provision Quantity = Rate of Sales * (Reorder Period + Deliver Period) + Reserve Quantity Net Cost of Merchandise Sold = Gross Cost of Merchandise Sold - Cash Discounts Net Markdown = Total Markdown - Markdown Cancellation Net Sales = Gross Sales - Customer Returns OTB = (a) Planned Sales + Planned EOM Stock + Reductions - Inventory on Hand - Merchandise on Order also (b) Planned Purchases - (Merchandise on Hand + Merchandise on Order) Unit OTB = Maximum - (On Hand + On Order) Percent =

Percentage Amount Base

Percentage Amount =

Percent Base

Planned Purchases at Cost = Planned Purchases at Retail * (100% - Planned Markup % ) Planned Purchases at Retail = Planned Sales + EOM Stock + Reductions - BOM Stock Profit % =

Profit Net Sales

Profit / Loss = Gross Margin - Expenses Rate of Sale (per week) =

Beginning Inventory + Receipts - Ending Inventory Reorder Period

Retail = Cost + Markup Retail = Cost - Cost % Sales per Employee Hour =

Net Sales Number of Employee Work Hours

Sales per Full@Time Equivalent =

Sales per Linear Foot =

Net Sales Number of Full@Time Equivalent Employees

$ Sales Linear Feet of Shelving

Sales per Square Foot of Gross Space =

Net Sales Square Feet of Space in Store

Sales per Square Foot of Selling Space =

Net Sales for Year Square Feet of Selling Space

Selling Cost % =

Gross Earnings Net Sales

Selected Formulas

289

Sell@Through % = =

(Original On Hand - Current On Hand) Original On Hand Number of Units Sold Number of Units Received

Shortage/Overage % =

StockⴚSales Ratio =

Stock Turnover =

Closing Book Inventory - Closing Physical Inventory Net Sales for Period

BOM Retail Stock Net Sales for Month

Net Sales for a Period Average Stock for a Period

Total Cost of Merchandise Sold = Gross Cost of Merchandise Sold - Cash Discounts + Alteration Costs Unit Average Inventory = Reserve + 1> 2 (Rate of Sale * Reorder Period) Weeks> Supply =

290

appendix B

26 Weeks Desired Stock Turnover

appendix C Answers to Practice Problems Chapter 2 Exercise 2.1 1. (a) 132.81

2. (a) 524.267

3. (a) $57.00

4. (a) $1,938.59

(b) 171.903

(b) 0.74505

(b) $175.88

(b) $98,956.56

(c) 875.515

(c) 55.421

(c) $4.91

(c) $195,938.35

(d) $702.80

(d) $85.65

(d) 0.78

(d) $813.33

6. (a) $3,888.97

7. (a) 405.33

5. (a) 7.10 (b) 13.73727 = 13.74

(b) 1,024.549 = 1,024.55

(b) 21.36

(c) 623.937 = 623.94

(c) $18,808.96

(c) $21,544.90

(d) 26.597744 = 26.60

(d) $5,846.15

(d) 42,896.56 (e) 0.10 (f) 50.00 (g) 1.00 (h) 597.90 (i) 10.37 (j) 534.01

Exercise 2.2 1.

225

7. (a) 63

2. 445

(b) 28

3. (a) 60

(c) 122

(b) 144

(d) 262

4.

30 dozen; 360 units

(e) 44

5.

13

(f) 21

6.

33

(g) 90 (h) 140 (i) 219 (j) 273

291

Exercise 2.3 1. (a) 1>4

2. (a) 0.125

3. (a) 2%

4. (a) .250

5. (a) 50.00%

(b) 1>400

(b) 2.0

(b) 12.5%

(b) 1.200

(b) 33.33%

(c)

1> 500

(c) 0.6

(c) 50%

(c) .400

(c) 16.67%

(d)

91> 200

(d) 0.8825

(d) 150%

(d) 2.625

(d) 12.50%

(e) 1.548

(e) 1,086%

(e) .750

(e) 40.00%

(e) 1>200 (f)

143> 400

(f) 0.08

(f) 125%

(f) .667

(f) 75.00%

(g)

1> 125

(g) 1.45

(g) 33.50%

(g) .625

(g) 166.67%

(h)

17> 20

(h) 1.0

(h) 265%

(h) .100

(h) 37.50%

(i)

19> 20

(j) 111>16

(i) 0.05

(i) 4%

(j) 0.0058

(j) 179.65%

Exercise 2.4 1. (a) $3.58

2. 23

3. $382.50

5. 4

6. $61.60

(b) $411.95 (c) 36.15 (d) $4.97 (e) 5.05 4. 21

Exercise 2.5 1. (a) 5.5

2. 6.25%

3. 68%

4. 60%

5. 35.6%

7. 45.57%

8. 2.86%

9. 80%

10. 51.28%

(b) 55 (c) 22.75 (d) 55.2 (e) 20 6. 67.21%

Exercise 2.6 1. (a) $292

2. $12,500

3. $62,500

4. $6,736

7. $27,500

8. 168

9. $140,133.84

5. $4,250

(b) $576 (c) 95 (d) $1,502.40 (e) 15.99 6. 200

10. $522.06

Exercise 2.7

292

appendix C

1. 58.44%

2. 64%

3. 22.22%

4. 8.33%

6. 80.95%

7. 8.79%

8. 5.51%

9. 30.77%

5. 34.73% 10. 6.06%

Chapter 3 On operating statements, round dollar figures to nearest dollar, but show all percents correct to two decimal places.

Exercise 3.1 1.

Net sales

$14,000

100.00%

Cost of merchandise sold

7,200

51.43

6,800

48.57

5,900

42.14

900

6.43

Gross margin Expenses Profit 2.

Net sales

$187,000

100.00%

Cost of merchandise sold

109,000

58.29

78,000

41.71

71,995

38.50

6,005

3.21

Gross margin Expenses Profit 3.

Net sales

$242,000

100.00%

Cost of merchandise sold

134,600

55.62

Gross margin

107,400

44.38

Expenses

91,960

38.00

15,440

6.38

Profit 4.

Net sales

$687,520

100.00%

Cost of merchandise sold

385,836

56.12

301,684

43.88

273,633

39.80

28,051

4.08

Net sales

$79,800

100.00%

Cost of merchandise sold

44,209

55.40

35,591

44.60

35,910

45.00

(319)

(0.40)

Gross margin Expenses Profit 5.

Gross margin Expenses Loss 6.

Net sales

$300,000

100.00%

Cost of merchandise sold

153,000

51.00

Gross margin Expenses Loss 7.

49.00 50.00

(3,000)

(1.00)

Net sales

$168,750

100.00%

Cost of merchandise sold

120,950

71.67

47,800

28.33

49,150

29.13

(1,350)

(0.80)

Gross margin Expenses Loss 8.

147,000 150,000

Net sales

$150,000

100.00%

Cost of merchandise sold

81,100

54.07

68,900

45.93

69,500

46.33

(600)

(0.40)

Gross margin Expenses Loss

Answers to Practice Problems

293

9. 48.00% 10. 55.00%

Exercise 3.2 1. $93,920.51 5. (a) Alice

2. 4.58% 7.56%

Brandon

5.19%

4. 11.35%

6.92

Carrie

10.49

David

6.27

(b) Department

3.

7.82%

6. $501,049.14 7. Gross sales

$680,366 66,676

Customer returns Net sales Cost of merchandise sold

613,690

100.00%

342,439

55.80

271,251

44.20

255,909

41.70

15,342

2.50

Gross margin Expenses

9.80%

Profit 8. Gross sales

$86,536

Customer returns

9,214

Net sales

$77,322

100.00%

Cost of merchandise sold

43,409

56.14

Gross margin Expenses

33,913

43.86

35,289

45.64

(1,376)

(1.78)

Loss 9. Gross sales

10.65%

$120,000

Customer returns

18,562

Net sales

101,438

100.00%

Cost of merchandise sold

56,218

55.42

45,220

44.58

41,220

40.64

4,000

3.94

Gross margin Expenses Profit 10. (a) Christopher

15.47%

4.69%

Jonathan

15.80

Jay

5.07

Suzanne

4.72

Zachary

4.31

(b) Department

7.75%

Exercise 3.3 1. 10.90%

2. $1,176.47

3. 15.61%

5. 153.75 hours

6. 26.71 hours

7. (a) $1,987.50 (b) $11.83

294

appendix C

4. 16.11%

$631.92

9. (a) Frank

Brian

$719.36

Gwen

5.15%

Charles

$325.32

Heather

4.74%

Deidre

$296.76

Jason

6.77%

Eve

$248.00

Kathy

6.32%

Lacey

5.91%

8. (a) Alexandria

(b) 6.11%

(b) Department 10. 37.25 hours

11.

$162.73

12.

$1,302,631.68

5.01%

5.51% 13. (a) 7 units (b) $32.00 (c) $68.00

14.

$2,060.61

15.

$2,890.00 16.

$69.38

Exercise 3.4 1.

$1,344

2. $23,994,000

3. $304.75

5.

2,040 sq ft

6. 3,048 sq ft

7.

4.

$45

$11

Exercise 3.5 1.

4.5

2. 3.88

3.

2.34

4. 5

Chapter 4 Exercise 4.1 1.

$963.65

2.

5.

$1,922.25 6.

$14,510.44 or $14,510.45

3. $1,554.76

4. $536.73

53.20%

7. $28.00

8. (a) Buyer: 30%, 15%, and 5% (b) Manufacturer: 25%, 15%, and 10%

9.

Sears = $299.25

10. $3,336.61

Collegiate Shop = $475

Exercise 4.2 Cash discount due by

Amount due ($)

(a). February 16

485

(b). September 8

485

(c). August 10

460

(d). November 24

470

(e). May 10

460

(f). September 13

470

(g). December 13

495

(h). October 10

485

(i). July 10

460

(j). October 11

470

(k). June 10

485

(l). December 11

495

(m). November 11

470

(n). August 17

485

(o). February 3

470

Answers to Practice Problems

295

Exercise 4.3 1. Retailer

2.

Vendor

3. $2,965

4.

$2,163.10

5. $8,358

6.

$9,475.20

7. $1,858

8.

$128,481

9. Option (a) is best for the buyer. Cost for option (a) $2,716; option (b) $2,882 10. Factor

Chapter 5 Exercise 5.1 1. Cost $48.80; Cost 32.75%

2. Markup 49%; Cost 51%

3. Retail $91.96; Cost 50%

4. Cost $110; Cost 25%

5. Markup 33.33% or 33 1>3%; Cost 66.67% or 66 2>3% 6. Retail $231.88; Cost 34.5%

7. Cost $1.15/unit; Cost 46%

8. Cost $13.21; Cost 57.5%

9. Retail $230.77; Cost 52%

10. Markup 46%; Cost 54%

11. Retail $178.57; Cost 56%

12. Cost $1.82; Cost 47.8%

13. Retail $21 unit; Cost 40%

14. Markup 42.31%; Cost 57.69%

15. Cost $40.11; Cost 42%

16. $28.57 unit retail or $342.86 per dozen

17. $83.25

18. $5,925.38

19. 59.09%

20. $29.32

21. $432

22.

23. (a) Cost 59.5%

(a) Cost 46.15% (b) Markup 53.85%

(b) Cost $10.71

24. 50%

25. (a) % based on retail 43.33% (b) % based on cost 76.47%

Exercise 5.2 1.

49.26%

2. 52.48%

3. 46.57%

4.

49.04%

5. 48.72%

6. 56.3%

Exercise 5.3 1.

$2,609.58

2.

$69.00

3. 66.84%

4. $243.35

5. 69.78%

6.

$18.29

7.

$28.67

8. $128.39

9. 62.96%

11.

$147.95

12.

55.47%

13. 43.67%

14. 59.00%

15. $86.75

10. $15

Exercise 5.4 1.

47.55%

2. 47.30%

3. 48.37%

4. 47.46%

5.

50.34%

2. 48.25%

3. 56.61%

4. 54.51%

5.

52.57%

Exercise 5.5 1. 296

appendix C

43.83%

Exercise 5.6 1. MM

48.75%

GM

49.75%

2. MM

52.81%

GM

53.20%

3. 38.13% 4. 38.36% 5. MM

47.50%

GM

48.53%

Chapter 6 Exercise 6.1 1.

70.83%

2.

5.42%

3.

43%

4. 70

5. (a) 33.33% (b) 40.42% (c) 36.88%

6.

16%

7. 15.25%

8.

$256,700

2.

3. (a) $30

9. $545,000

10. 32.20%

4. $301

5. 14.45%

Exercise 6.2 1.

(a) $72

$90

(b) $168 6.

(b) $1,020

(a) $540

7. $960

8.

10.02%

9. $3,354

10. $480

(b) $810

Exercise 6.3 1.

12.5%

2.

16.95%

3. (a) $62.25

4. $526.71

(b) $201.69 5.

$941.14

9.

$44.10

6.

$110.03

10. (a) $42.50

7. 11.

$1,056.86

8. $143.29

$35.36

12. $66.16

(b) $7.50

Chapter 7 Exercise 7.1 1.

$269,664

2.

(a) $244,550

3.

(b) $55,576

(a) $122,432

4.

$108,505

4.

0.96% shortage

(b) $31,462

Exercise 7.2 1.

1.90% shortage

2. (a) 0.81% overage

3.

1.16% overage

Exercise 7.3 1.

$7,840

2. (a) $32,484 (b) 1.02%

3. (a) $28,185 (b) $28,027

4. (a) $17,022 (b) 1.02% (c) $16,770 Answers to Practice Problems

297

Exercise 7.4 1. (a) $89,340

2. (a) $30,340

(b) $46,680

(b) 2.03%

(c) $64,440

(c) $12,880

3. See completed form for answers to Exercise 7.4 #3 (Figure C-1). These values were calculated using cost percent rounded to four decimal places (52.5445%). (a) $88,182 (b) $86,057 (c) 44.72%

Merchandise Handled: Opening inventory Gross purchases Returns to vendors (minus) Net purchases Transfers out Transfers in Net transfers out (minus) Freight Additional markup Total Merchandise Handled Cost % of total merchandise handled

Cost $31,680

Retail $58,426

$86,780 2,320

$168,342 4,127

2,324 1,550

4,470 2,980 774 1,018

1,490 345 $116,384

168,050 12,378 155,672 11,136 476 10,660 480 166,812

Closing Book Inventory Closing Physical Inventory*

28,202

Shortage Gross Cost of Merchandise Sold Cash discounts (minus) Net cost of merchandise sold Alteration costs (plus) Total Cost of Merchandise Sold

* Cost value will be $28,199 if 52.54% is used.

FIGURE C-1 Solution to Practice Problem 7.4 #3.

298

appendix C

$221,496

52.5445%

Deductions: Gross sales Customer returns Net sales Markdowns Markdown cancellations Net markdowns Employee discounts Total Deductions

Gross Margin $ (Net sales  Total cost of merchandise sold) Gross Margin % (Gross margin $ ÷ Net sales)

164,215

84,460

$54,684 53,672 $1,012

$88,182 2,957 $85,225 832 $86,057 $69,615 44.72%

Merchandise Handled: Opening inventory Gross purchases Returns to vendors (minus) Net purchases Freight Additional markup Total Merchandise Handled Cost % of total merchandise handled

Cost $147,460

Retail $289,130

$452,660 2,690

$1,005,780 5,380 449,970 29,730

540 $627,160

$1,290,070

48.6144%

Deductions: Gross sales Customer returns Net sales Markdowns Markdown cancellations Net markdowns Employee discounts Total Deductions

870,430 81,760 788,670 216,910 13,680 203,230 2,780 994,680

Closing Book Inventory Closing Physical Inventory*

137,467

Shortage Gross Cost of Merchandise Sold Cash discounts (minus) Net cost of merchandise sold Alteration costs (plus) Total Cost of Merchandise Sold Gross Margin $ (Net sales  Total cost of merchandise sold) Gross Margin % (Gross margin $ ÷ Net sales)

1,000,400

$295,390 282,771 $12,619

$489,693 6,470 $483,223 720 $483,943 $304,727 38.64%

* If 48.61% is used, this cost value will be $137,455

FIGURE C-2 Solution to 7.4 #4 4. See completed form for answers to Exercise 7.4 #4 (Figure C-2). 38.64%

Exercise 7.5 1.

3.39

2.

2.15

3.

2.04

4.

3.8

5. (a) 47.75% (b) 43.72% 6. (a) 50.87% (b) 45.47% 7. (a) 47.46% (b) 43.35% Answers to Practice Problems

299

Merchandise Handled: Opening inventory Gross purchases Returns to vendors (minus) Net purchases Freight Additional markup Total Merchandise Handled Cost % of total merchandise handled

Cost $147,460

Retail $289,130

$452,660 2,690

$1,005,780 5,380 449,970 29,730

540 $627,160

870,430 81,760 788,670

180,000 2,780 971,450

Closing Book Inventory

154,895

Shortage Gross Cost of Merchandise Sold Cash discounts (minus) Net cost of merchandise sold Alteration costs (plus) Total Cost of Merchandise Sold Gross Margin $ (Net sales  Total cost of merchandise sold) Gross Margin % (Gross margin $  Net sales)

$472,265 6,470 $465,795 720 $466,515 $322,155 40.85%

FIGURE C-3 Solution to 7.5 #8

8. See completed form for answers to Exercise 7.5 #8 (Figure C-3). (a) 40.12% (b) 40.85%

Chapter 8 Exercise 8.1 1. 11.54% 4. October

2. $595,700 $84,000

November

114,000

December

144,000

January

appendix C

$1,290,070

48.6144%

Deductions: Gross sales Customer returns Net sales Markdowns Markdown cancellations Net markdowns Employee discounts Total Deductions

300

1,000,400

72,000

3.

$174,400

$318,620

5.

March

10.71%

April

9.68%

May

10.34%

June

Trend not clearly established, increase of 10% reasonable

6. Increase between 9.5% and 10.0%

7.

8.

August

$98,677 to $99,128

September

105,406 to 105,887

October

91,945 to 92,365

November

130,751 to 131,348

December

157,849 to 158,569

January

78,832 to 79,192

February

5%

March

11%

April

16%

May

24%

June

33%

July

11%

February

13

March

29

April

42

May

62

June

86

July

29

Exercise 8.2 1.

0.45

2. 0.34

3.

$366,667

4.

6.59

5. 3.46

6.

(a) 2.35 (b) 1.55 (c) 0.53

Exercise 8.3 1.

3.57

2. $121,600

3.

4.

$442,000

5. 2.22

6. 5.2

7.

$71,500

8.

9.

August

$56,000

September

$63,000

10. February

$27,000

$54,250

$345,600

March

$358,400

April

$417,600

May

$417,600

June

$475,200

July

$435,200

Answers to Practice Problems

301

Exercise 8.4 1. 16%

2.

$49,400

3. (a) $45,000

4. (a) $67,750

(b) $24,300

(b)

$35,230

Exercise 8.5 1. See answers on the completed six-month merchandise plan (Figure C-4) for answers to Exercise 8.5 #1

(a) Sales

EOM (d) Stock

(b) Markdowns

BOM (c) Stock

Planned (e) Purchases

$100,750

$347,522

$21,450

$334,522

$135,200

March

113,750

357,272

17,160

347,522

140,660

April

123,500

350,772

27,170

357,272

144,170

May

117,000

334,522

22,880

350,772

123,630

June

100,750

328,022

25,740

334,522

119,990

July

94,250

342,105*

28,600

328,022

136,933

February

(f ) Initial markup needed = 51.15%

*Note: EOM for July is average inventory (Sales , Turnover = $650,000 , 1.9).

2. Stock–Sales Ratios February

3.3

March

3.1

April

2.9

May

3.0

June

3.3

July

3.5

3. See answers on the completed six-month merchandise plan (Figure C-5) for answers to Exercise 8.5 #3.

February

(a) Sales

BOM (c) Stock

appendix C

Planned (e) Purchases at Retail

Planned Purchases at Cost

$31,164

$118,423

$2,056

$149,587

$64,384

31,870

March

35,616

149,587

1,745

155,820

43,594

21,579

April

44,520

155,820

1,914

140,238

30,852

15,272

May

38,955

140,238

1,870

135,897

36,485

18,060

June

36,729

135,897

1,983

138,902

41,717

20,650

July

35,616

138,902

2,671

124,359

23,743

11,753

(f) Turnover for Season = 1.6

302

(b) Markdowns

EOM (d) Stock

SIX-MONTH MERCHANDISING PLAN

Last Year % initial markup % markdowns % alteration expense % cash discount % gross margin % operating expense % net profit season turnover average stock GMROI

Department Name: Department Number: Merchandise Manager: Buyer: Period:

SALES

EOM STOCK

MARKDOWNS

BOM STOCK

PLANNED PURCHASES AT RETAIL PLANNED PURCHASES AT COST

SPRING LY Sales PL Sales Revised Actual % Change % of LY Sales % of PL Sales LY EOM Stock PL EOM Stock Revised Actual LY Markdowns PL Markdowns Revised Actual % Change % of LY Markdowns % of PL Markdowns LY BOM Stock PL BOM Stock Revised Actual

Actual

34.00% 7.50% 1.90 $342,105

SEASON TOTALS

February

March

April

May

June

July

$100,750

$113,750

$123,500

$117,000

$100,750

$94,250

15.50%

17.50%

19.00%

18.00%

15.50%

14.50%

$347,522

$357,272

$350,772

$334,522

$328,022

$342,105

$2,060,215

$21,450

$17,160

$27,170

$22,880

$25,740

$28,600

$143,000

15.00%

12.00%

19.00%

16.00%

18.00%

20.00%

$334,522

$347,522

$357,272

$350,772

$334,522

$328,022

$2,052,631.58

$140,660

$144,170

$123,630

$119,990

$136,933

$800,583

$67,448

$69,131

$59,282

$57,536

$65,661

$383,886

Basic Stock $ 233,771.93 LY Purchases @ Retail PL Purchases @ Retail $135,200 Revised Actual LY Purchases @ Cost PL Purchases @ Cost $64,830 Revised Actual

AUTHORIZATION SIGNATURES:

Plan 52.05% 22.00% 0.00% 0.00%

$650,000

AUTHORIZATION DATE:

Buyer Merchandise Manager Controller FIGURE C-4 Answers to Practice Problems

303

SIX-MONTH MERCHANDISING PLAN

Last Year % initial markup % markdowns % alteration expense % cash discount % gross margin % operating expense % net profit season turnover average stock GMROI

Department Name: Department Number: Merchandise Manager: Buyer: Period:

SALES

EOM STOCK

MARKDOWNS

BOM STOCK

PLANNED PURCHASES AT RETAIL PLANNED PURCHASES AT COST

SPRING LY Sales PL Sales Revised Actual % Change % of LY Sales % of PL Sales LY EOM Stock PL EOM Stock Revised Actual LY Markdowns PL Markdowns Revised Actual % Change % of LY Markdowns % of PL Markdowns LY BOM Stock PL BOM Stock Revised Actual LY Stock/Sales Ratio PL Stock/Sales Ratio LY Purchases @ Retail PL Purchases @ Retail Revised Actual LY Purchases @ Cost PL Purchases @ Cost Revised Actual

AUTHORIZATION SIGNATURES: Buyer Merchandise Manager Controller FIGURE C-5 304

appendix C

February

March

April

May

Plan 50.50% 5.50%

Actual

1.62 $137,604

June

July

SEASON TOTALS $222,600

$31,164

$35,616

$44,520

$38,955

$36,729

$35,616

14.00%

16.00%

20.00%

17.50%

16.50%

16.00%

$149,587

$155,820

$140,238

$135,897

$138,902

$124,359

$844,804

$2,056

$1,745

$1,914

$1,870

$1,983

$2,671

$12,240

16.80%

14.26%

15.64%

15.28%

16.20%

21.82%

$118,423

$149,587

$155,820

$140,238

$135,897

$138,902

3.80

4.20

3.50

3.60

3.70

3.90

$64,384

$43,594

$30,852

$36,485

$41,717

$23,743

$31,870

$21,579

$15,272

$18,060

$20,650

$11,753

AUTHORIZATION DATE:

$838,868

Chapter 9 Exercise 9.1 1.

$1,200

2. $530

3.

Retail OTB $3,400

4.

Overbought $1,800

Cost OTB $1,717 5.

Retail OTB $28,800

6. $17,500

Cost OTB $13,824

Exercise 9.2 1.

See completed assortment plan (Figure C-6) for answers to Exercise 9.2 #1.

2.

See completed assortment plan (Figure C-7) for answers to Exercise 9.2 #2.

3. (a) $2,625 (b) 175 units 4.

varies by selection

Exercise 9.3 1.

10

2.

37

3. OTB 17 Turnover 11.56

Home Linens Subclass Subclass Sheets

% of subclassification 45%

% of style

Twin

20%

King

Turnover 10.4

Color

% of color

white fashion colors

30% 70%

white fashion colors

30% 70%

white fashion colors

30% 70%

white fashion colors

30% 70%

solid patterned

35% 65%

solid patterned

35% 65%

solid patterned

35% 65%

solid patterned

35% 65%

20%

35%

25%

35% Twin

Full

Queen

King

Accessories

OTB 150

Color

Style

Queen

5.

Average stock 100

Style

Full

Comforters

4. OTB 25

20%

20%

35%

25%

20% throw pillows dust ruffles throws

35% 35% 30%

FIGURE C-6 Answers to Practice Problems

305

Subclass Subclass Tops and Sweaters

Size % of subclassification 35%

Style

% of style

XS

10%

S

M

L

XL

Dresses

S

M

L

XL

S

306

appendix C

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

25%

30%

25%

10%

10%

25%

30%

25%

10%

15% XS

FIGURE C-7

% of color

20% XS

Pants & Jeans

Price zone Color

10%

25%

Subclass Subclass

Size % of subclassification

Style M

L

XL

Shorts & Capris

Price zone Color

% of color

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

25%

10%

10% XS

S

M

L

XL

Jackets

% of style 30%

10%

25%

30%

25%

10%

10% XS

S

M

L

10%

25%

30%

25%

FIGURE C-7 Continued

Answers to Practice Problems

307

Subclass Subclass

Skirts

Size % of subclassification

Style XL

S

M

L

XL

S

M

L

XL

308

appendix C

% of color

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

low moderate high

25% 45% 30%

10%

25%

30%

25%

10%

5% XS

FIGURE C-7 Continued

Price zone Color

5% XS

Swimwear

% of style 10%

10%

25%

30%

25%

10%

appendix D Answers to Pretest 1. (a) 795 (b) $117.07 (c) $2,418.51 (d) $99.97 2. (a) $116.02 3. (a) $11.80

4. $767.00

8. $77.50

11. $3,353.50

5. (a) $138.29

9. (a) $50.00

12. $222.91

(b) $46,667.15 6. (a) $121.23 (b) 599 7. $125.77

(b) 0.91%

13. $16.00

(c) $25.00

14. $780.00

(d) $6.98 10. $76.49

(b) $129.56 (c) $5,124.95

309

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index

Above-the-market pricing, 143, 163 Accounting, as corporate-level function, 55 Actual on-hand stock amounts, 259 Adding decimals, 21 fractions, 382 Additional markup, 158, 162 Advanced dating defined, 89, 95 payment calculation, 89 Advertising, markdowns in, 153 Allowances buying, 90, 95 defined, 90, 95 example, 91 negotiations, 80 percent, 90 promotional, 90, 96 as rebates, 91 slotting, 90, 96 trade, 90, 96 Alteration/workroom costs, 54 Arithmetic, 19 As of dating. See Advanced dating Assistants, 10 Assortment plans adjustments, 264 defined, 262–263 preparing, 264–266 steps, 264 At-the-market pricing, 143–144, 162 Automatic markdown policy, 151 Average earnings per hour, 57 Average inventory at cost, 195 Average markups. See also Markups averaging costs, 117–119 averaging retail, 119–121 calculating markup percent on purchase balances, 119–210 case study, 137 in cumulative markup, 128 defined, 115 determining, 115 practice of, 115 practice problems, 121–123 total cost in, 115 total retail in, 115 Average stock. See also Stock turnover calculating, 220–221 defined, 220 formulas, 220–221 Averaging costs. See also Costs defined, 117 examples, 118–119 Averaging retail defined, 119 examples, 119–120

A

Back office, 93 Base defined, 38 examples, 34–35 finding, 34–35 formula, 34 practice problems, 35–36 Basic Arithmetic Pretest, 19–21 answers, 309 defined, 19 rules, 19 Basic merchandise, 217 Basic stock list defined, 263, 272 elements, 263 Basic stock method. See also Planning stocks defined, 225, 243 example, 226 formulas, 225, 287 Basics. See also Assortment plans; Basic merchandise defined, 263, 272 fashion, 263, 272 maintenance, 263 planning/control, 264 sales curves, 217 seasonal, 263, 272 staple, 263, 272, 281 Basic stock list, 263 Beginning inventory, 175 Beginning-of-the-month (BOM) stock calculating, 229 defined, 220 formula, 225, 228 in merchandise plan preparation, 236 Billed cost. See also Gross cost in cost of merchandise sold, 54 defined, 82, 84, 95, 123, 132 in initial markup, 123 Book inventory. See also Inventory calculating, 175–178 closing, 185 defined, 175, 182, 198 formula, 287 maintaining, 175–176 practice problems, 177–178 retail reductions, 176–177 total merchandise handled, 175–176 Broken assortments, 150 Buyers centralized, 14 decentralized, 14 defined, 10 efficiency, measuring, 13–14 evaluation, 3 in flagship stores, 7 sales curve use, 217

B

Buying allowance, 90, 95 centralized, 7, 16 decentralized, 10, 14 errors, 149 mathematics importance, 13–14 successful, 13

Calculations. See also Formulas book inventory, 174–181 closing book inventory, 185 cost of closing book inventory, 185 cost percent, 185 cumulative markup, 196 gross cost of merchandise sold, 186 gross margin, 186, 188 maintained markup, 196 markdown percent, 152–153 markup, 107–111 markup percent, 105 open-to-buy, 258–262 percent, 27 percent increase/decrease, 36–37 retail price, 108 shortage, 178–181 stock turnover, 220–224 stock-sales ratio, 227–228 total cost of merchandise sold, 186 Calculators, 30 Case studies on assortment planning, 275–276, 277–278, 279–280 on average cost determination, 136–137 on corporate social responsibility (CSR), 74–76 on cost of merchandising calculation, 99 on initial markup and average markup calculation, 137 on inventory management, 202, 203–204, 204–205 on planned markdowns, 250–251 on POS (point of sales) markdown, 167, 169–170 on pricing strategies, 170–171 on profitability measurement, 72–73 on retail markup, 138–139 on sales and inventory management, 251–252 on sales per square foot, 76–77 on six-month merchandise (dollar) planning, 252–253 on vendor selection, 100, 101 Cash discounts. See also Discounts in cost of merchandise, 54 deduction, 84 defined, 84, 96 examples, 85 initial markups and, 124

C

311

Cash discounts (Continued) as profit cushion, 85 terms, 84 Cash on delivery (COD), 87, 95 Centralized buyers, 14 Centralized buying, 7, 14 Chargebacks, 152, 162 Closing book inventory, 185 Commissions defined, 57, 67 examples, 57 figuring with percents, 27 formula, 57 hourly wage combination, 57 Common denominators, 281–282 Competition, as pricing factor, 144 Competitive pricing, 142–144 Computer spreadsheets, 190 Computerized sales registers, 177 Consumers demand, pricing related to, 146–147 right price for, 145 Contribution defined, 55, 67 formula, 287 Controllable margin, 55, 67 Controllers, 12 Conversion decimal to percent, 28 fraction to percent, 28 percent to decimal, 27 percent to fraction, 27 planned purchases, 236 practice problems, 29 retail value to cost value, 234 Cost complement defined, 109, 132 formula, 109 Cost negotiations, 80 Cost of merchandise sold, 79–101 allowances, 90–91 case study, 99 cost negotiations, 80 dating, 87–90 discounts, 82–87 factors, 54, 93 in operating profit, 45 percents of net sales, 47 practice problem, 50 services negotiation, 80 summary problems, 96–98 Cost price calculating when retail and markup percent are known, 109 formula, 110 markup based on, 105–106 total, 115 Costs averaging, 117–119 billed, 82, 84, 123 gross, 84, 95, 129, 186 handling, 145 insurance, 91 net, 96 selling, 145 transportation, 91–93 workroom/alteration, 124 Cumulative dollar retail, 128, 132 Cumulative markup. See also Markups calculation, 196 defined, 128, 132 example, 128 formula, 128, 287

312

index

percent, 128 practice problems, 129 Customer discounts. See also Price changes defined, 159 practice problems, 160–162 types of, 160 Customer loyalty programs, 160 Customer returns percent formula, 50, 288

Damage allowance, 90–91 Dating advanced, 89, 95 COD, 87, 95 defined, 84, 87, 95 EOM, 88, 95, 97 extra, 88, 95 practice problems, 89 regular, 88, 95 ROG, 88, 95 terms, 84 Decentralized buyers, 14 Decentralized buying, 10, 14 Decimals. See also Mathematics adding, 22 conversion to percents, 28 dividing, 22 multiplying, 22 percents, conversion to, 28 practice problems, 24–25 rounding, 23 subtracting, 22 uses, 21 working with, 21 Decrease, percent calculating, 36–38 examples, 36 formula, 36 practice problems, 37–38 Delivery period (DP), 267 Denominators common, 281–282 defined, 281 Direct expenses, 54, 67 Discount coupons, 160 Discount date, 87 Discounts cash, 84–85, 96 customer, 160 defined, 82, 123, 159, 162 employee, 159, 176 figuring with percents, 27 negotiations, 80 practice problems, 86–87 on profit-and-loss statement, 160 quantity, 82, 95 quoting, 82 seasonal, 84, 96 series of, 82 trade, 82–84, 95, 123 Discussion questions corporate social responsibility (CSR), 76 cost of merchandise sold, 99 dollar merchandise plan, 253 introduction, 15 inventory valuation, 202, 203, 205 markup, 127 open-to-buy, 279 POS (point of sales) markdown, 167, 170 pricing strategies, 171 profitability, 73 retail pricing, 167

D

sales per square foot, 77 vendor selection, 100, 101 Distribution, 8 Dividing decimals, 22 fractions, 284 Divisional merchandise managers (DMMs), 8, 14 Divisors, 22 Dollar merchandise plan, 207–253. See also Merchandise planning case study, 250 completion steps, 235–236 defined, 208, 243 detail, 209 discussion questions, 253 emphasis, 209 essential elements, 209 figure sources, 209 format, 209–211 forms, 239 forms, additional, , 258–261 illustrated, 209, 235, 239 merchandise plan, 208–209 minimal factors, 235 period, 208 personal budget and, 209–210 planning purchases, 233–234 planning reductions, 233 planning sales, 211–216 planning stocks, 219–231 preparation, 235–241, 243–248 retail value to cost value conversion, 234 six-month, 209, 239 summary problems, 243–249 Dozen defined, 38 fractional parts, 25

Employee discounts. See also Price changes defined, 159, 179 example, 160 practice problems, 160–162 End-of-month (EOM) dating. See also Dating defined, 88, 95 in merchandise plan preparation, 236 End-of-month (EOM) stock, 220 Errors buying, 149 pricing, 149 selling, 149–150 Estimated physical inventory. See also Physical inventory defined, 181, 198 formula, 288 use of, 186 Estimated sales, 64 Estimated shortage. See also Shortages adjustment, 181 defined, 181, 198 formula, 288 percent, 186 practice problems, 182–183 Everyday low pricing (EDLP), 144, 162 Expense control as profit factor, 55 Expenses classification, 54 direct, 54, 67 indirect, 54, 67 in loss, 46 operating, 54

E

in operating profit, 45 percent, 47 Extra dating defined, 88, 95 example, 88

Factors affecting pricing, 144–145 defined, 93, 96 initial markup, 123–124 retail reductions, 123 selection, 263, 272 Fashion, 211 Fashion basics, 263, 272 Fashion goods defined, 263, 272 planning/control, 263 Financial control division, 12 Findings, 38 Five “rights,” 6, 14 Flagship stores, 7, 14 FOB (free on board). See also Transportation defined, 92, 96 destination, 92–93, 96 destination; charges reversed, 92, 96 factory (origin), 92, 96 shipping (consolidation), 92, 96 Formulas, 287–290 average stock, 220–221, 287 average stock for season, 225, 287 base, 34 basic stock, 225, 287 BOM stock, 225, 228, 287 book inventory, 185, 287 closing book inventory, 185 commission, 57 contribution, 287 cost complement, 109 cost price, 109 cumulative markup, 128, 288 customer returns percent, 50, 288 estimated physical inventory, 288 estimated sales, 64 estimated shortage, 288 gross cost of merchandise sold, 186, 288 gross margin, 45, 46, 130, 237, 288 gross margin percent, 130, 288 gross margin return on inventory (GMROI), 195, 288 gross sales, 50 initial markup, 123, 288 initial markup percent, 123, 124, 288 list, 287–290 loss, 46 maintained markup, 129, 288 maintained markup percent, 129 markdown percent, 152, 232, 288 markup, 104, 288 markup percent based on cost, 106 markup percent based on retail, 105, 288 maximum quantity, 268–269, 290 net cost of merchandise sold, 186 net markdown, 155, 290 net markdown percent, 155 net sales, 47, 50 open-to-buy, 257, 290 percent decrease, 37 percent increase, 36 percent rate, 31 percentage change, 36 planned dollar markdowns, 232

F

planned purchase at cost, 233 planned purchases at retail, 233, 289, 298 profit/loss, 289 rate of sale, 268, 289 retail price, 109 sales increase/decrease, 211 sales per employee hour, 59 sales per full-time employee equivalent, 60 sales per linear foot, 65, 289 sales per square foot, 64, 64, 289 sales per transaction, 58 selling cost percent, 56, 289 shortage percent, 178, 290 space allocation, 64 stock turnover, 225, 290 stock-sales ratio, 227, 290 total cost of merchandise sold, 186, 289 unit average inventory, 390 Fractions adding, 282 common denominators, 281–282 conversion to percents, 28 denominators, 281 dividing, 284 fractional parts, 284 improper, 282 multiplying, 283 numerators, 281, 293 percents conversion to, 27 reducing to lowest terms, 282 review, 281–285 subtracting, 283–284 Full-time employees defined, 60, 67 equivalent, 67 Functional discounts. See Trade discounts

General merchandise manager (GMM), 9, 14 Good value, 145 Gross, 38 Gross cost. See also Costs defined, 84, 95 in maintained markup, 129 merchandise sold, 185, 186 Gross cost of merchandise sold defined, 130 formula, 185, 288 in maintained markup calculation, 196 Gross margin. See also Margins calculation form, 188 defined, 45, 67, 130, 133 examples, 46, 131, 191–192 formulas, 45, 46, 130, 288 maintained markup versus, 136 practice problems, 49–50 Gross margin percent calculation, 180 formula, 47, 288 Gross margin return on inventory (GMROI) defined, 56, 195, 198 examples, 195 formula, 195, 288 practice problems, 196–197 Gross profit. See Gross margin Gross sales. See also Sales defined, 50, 67 formula, 51 Gross space sales per square foot, 63

G

Handling costs, 145 High-low pricing, 144, 162 Human resources division, 12 Human resources productivity measurement, 56

H I

Improper fractions, 282 Income statement. See Profit-and-loss statement Increase, percent calculating, 36–38 examples, 36–37 formula, 36 practice problems, 37–38 Indirect expenses, 54, 67 Initial markup. See also Markups billed cost in, 123 case study, 137 cash discounts and, 124 defined, 123, 132 determining, 126 examples, 124–126 factors, 123–124 formula, 123, 288 percentage formula, 123, 124, 288, 298 practice problems, 126–127 reductions, 123 workroom/alteration costs and, 124 Insurance costs, 91 Introductory allowances. See Slotting allowances Inventory average at cost, 195 beginning, 175 book, 175–178, 182, 198 GMROI, 56, 195, 198 increase transactions, 175, 178 knowing, 174 measurements, 14 perpetual, 174 physical, 178, 181 productivity measure, 55 profitability measure, 195 reduce transactions, 175 shortage, 178–181 Inventory valuation, 173–205 case study, 203 discussion questions, 203–204 methods, 183–195 original-cost method, 188 RIM, 183–195 summary problems, 198–201 Invoices date, 84 defined, 81, 96 net terms, 85 Jobbers, 152, 162

J K L

Keystone markup, 105

Lead time (LT), 268 Leading pricing, 143 List price, 82, 96

index

313

Loss. See also Profit defined, 46 formula, 46 in parentheses, 46 profit versus, 46 Loss leaders, 143, 162

Maintained markup. See also Markups calculation, 196 defined, 129, 133 determination, 130 examples, 130, 131 formula, 130, 289 gross margin versus, 130 percent formula, 130 practice problems, 131–132 Manufacturers merchandising by, 5–6 as pricing factor, 144 primary goal, 6 retail merchandising by, 11 Margins controllable, 54 defined, 45 gross, 45, 130, 133 measurements, 14 Markdown cancellation defined, 155, 162 example, 155 occurrence, 155 practice problems, 157–158 Markdown guarantees, 90, 96 Markdown money defined, 151, 162 unavailable, 151 Markdown percent calculating, 152–153 examples, 152, 153 formulas, 152, 288 net sales and, 152 this workbook, 153 Markdowns. See also Price changes in advertising, 153 amount, 150–151 automatic policy, 151 broken assortments and, 150 buying errors and, 149 case study, 167, 250 as corporate-driven, 151 defined, 149, 162 effectiveness, 147 as merchandising tool, 149 net, 155–158, 162, 176 out-of-season goods and, 150 permanent, 155, 162 planned, 232, 258 point-of-sale, 167–168 practice problems, 154 pricing errors and, 150 as promotional tool, 150 purpose, 149 reasons for, 149–151 seasonal goods, 150 selling errors and, 150 special purchases and, 150 temporary, 155, 163 timing, 150–151 vendors and, 151 Markon, 105, 133 Markup cancellation, 158–159

M

314

index

Markup percent, 105–106 based on cost, 106–107 based on cost and retail, 108 based on retail, 105–106 calculation, 104 on entire order, 111–114 on group of items, 111–114 known cost and retail, 108–109 needed on balance of purchases, 116 percent based on retail formula, 288 planned, 116–117 practice problems, 110–111 varying, 115 Markups additional, 158–159, 162 average, 115–123 cancellations, 158–159 case study, 137 cumulative, 128–129, 132 defined, 103–105, 133 discussion questions, 137 formulas, 104, 288 goal, 146–147 initial, 123–127, 133 maintained, 129–132, 133 as merchandising tool, 103–139 statistics, 105 summary problems, 133–136 Mathematics arithmetic, 19 buying/merchandising importance, 13–14 decimals, 21–25 fractions, 281–285 percents, 27–38 unit measure, 25–26 Maximum (provision) quality (M), 268 Maximum quantity defined, 272 formulas, 268, 289 Mazur, Paul M., 3 Mazur Plan, 3, 12 Measurements inventory, 14 margin, 14 performance, 56 productivity, 55 sales, 13–14 Merchandise on hand (OH), 268 Merchandise on order (OO), 268 Merchandise plan preparation. See also Dollar merchandise plan BOM stock figures, 236 EOM stock levels, 236 example, 236–239 forms, 239 illustrated, 235 monthly planned purchases, 236 planned percents, 236 planned purchases conversion, 236 practice problems, 239–241 reductions determination, 236 steps, 235–236 total planned sales determination, 236 Merchandise planning dollar merchandise plan, 207–253 goals, 208 open-to-buy, 208, 255–280 purposes, 208 tools, 208–209 Merchandising activities, 5 centralized, 7 decentralized, 10–11

defined, 3–4, 14 five “rights”, 6, 14 by manufacturers, 5–6 mathematics importance, 13–14 successful, 14 by wholesalers, 5–6 Merchandising division organization, 8–9 organizational chart, 8 relationship to other divisions, 12–13 Merchandising staff bureaus, 10 Mixed numbers, 282 Model stock plan, 263, 272 Multiplying decimals, 21 fractions, 283

National Retail Security Survey (NRSS), 178 Negotiations allowances, 80 cost, 80 discounts, 80 services, 93 transportation, 80 Net cost, 96 Net markdown. See also Markdowns defined, 155, 162, 176 examples, 155–157 formula, 155, 289 percent, 155–157 practice problems, 157–158 Net payment date, 87, 96 Net price revisions, 175 Net purchases, 175 Net receipts, 175 Net sales. See also Sales defined, 50, 67, 176 examples, 47, 51–52 formula, 47, 50 in maintained markup, 129–130 percent, 47 practice problems, 52–54 in stock turnover, 221 Net terms, 85, 96 Net transfers, 175 Normal dating. See Regular dating NRF Retail Accounting Manual, 54 Numerators, 281

N

On-order stock amounts, 267 Open-to-buy (OTB), 207, 255–280. See also Merchandise planning assortment plans, 207 calculating, 258–262 calculation intervals, 257 case study, 275 defined, 208, 243, 257, 272 discussion questions, 275 dollar, holdback, 257 dollar planning, 255 examples, 258–261 formulas, 257, 289 increasing, 258 periodic reorder forms, 267 practice problems, 261–262 sales curves, 213–217, 267 stock requirement, 263 summary problems, 273–274

O

unit planning, 262–264 use, 255 Operating expenses classification, 54 direct, 54, 67 indirect, 54, 67 as profit factor, 54 Operating income defined, 50 in operating profit, 45 Operating profit defined, 45, 67 misconception, 45 occurrence, 46 percent, 47 Operating statement. See Profit-and-loss statement Operations division, 12 Ordinary dating. See Regular dating Organizational charts apparel manufacturing firm, 11 merchandising division, 8 retail division (apparel manufacturing firm), 11 retail store corporation, 6 Original-cost inventory valuation, 188–190 Out-of-season goods, 150 Outstanding orders, 258 Overage. See also Shortages amount, 178 defined, 178 formula, 290

Parentheses, 46 Patronage discounts. See Quantity discounts Percentage amounts defined, 30, 38 examples, 30 finding, 30–32 practice problems, 31 Percentage change calculating, 36 examples, 36 formula, 36 practice problems, 37–38 Percents allowance, 90 amount, finding, 30–31 base, finding, 34–36 basic calculations, 28 conversion practice problems, 29 conversion to decimals, 27 conversion to fractions, 27 customer returns, 50 decimal conversion to, 28 defined, 27, 38 estimated shortage, 187 expenses, 47 fraction conversion to, 28 gross margin, 130 increase/decrease, 36–38 maintained markup, 129 markdown, 152–153 markup, 104–105 in merchandising calculations, 27 net markdown, 155–157 net sales, 47–48 profit, 46 questions answered by, 27 rate, finding, 31–32 sales increase/decrease, 211 selling cost, 56–58

P

shortage, 178 skeletal statement, 47 uses, 27 using, 30–38 Performance measures, 56 practice problems, 60–62, 65 sales per employee hour, 59 sales per full-time employee equivalent, 60 sales per linear foot of shelf space, 65 sales per square foot, 63–64 sales per transaction, 58–59 selling cost, 56–58 Periodic reorders calculation, 267 delivery period (DP), 267 examples, 268–271 forms, 267 lead time (LT), 268 maximum (provision) quality (M), 268 maximum quantity formulas, 268 merchandise on hand (OH), 268 merchandise on order (OO), 268 periodic inventory sheets, 267 practice problems, 271–272 rate of sale (RS), 268 reorder period (RP), 267–268 reserve (R), 268 reserve quantity size, 271 Permanent markdowns. See also Markdowns defined, 155, 162 point-of-sale markdowns versus, 167–168 Perpetual inventory, 174 Physical inventory book adjustment to, 178 case study, 203 defined, 181, 198 estimated, 181, 187, 198 given, 187 value, 185 Planned closing stock, 258 Planned dollar markdowns, 233 Planned for delivery merchandise, 233 Planned markdowns. See also Markdowns formula, 233 increasing, 258 Planned purchases. See Planning purchases Planning in centralized merchandising, 8 reductions, 232 Planning purchases conversion, 236 defined, 233, 243 examples, 233–234 formula, 233, 289 in merchandise plan preparation, 236 practice problems, 235 Planning sales. See also Dollar merchandise plan examples, 211–212 factor evaluation, 211 fashion factor, 211 organizational factors, 211 practice problems, 218–219 sales figure analysis, 211 sales increase/decrease, 211 Planning stocks. See also Dollar merchandise plan basic stock method, 225–226 methods, 220 practice problems, 230–231 stock turnover, 220–224 stock-sales ratio, 227–229 weeks’ supply method, 224–225 Point-of-sale markdowns, 167–168

Practice problems answers, 291–308 average markups, 121–122 assortment planning, 266 book inventory, 177–178 cumulative markup, 129 customer discounts, 161 dating, 89 decimals, 24–25 discounts, 86–87 employee discounts, 161–162 estimated shortage, 182–183 gross margin, 49–50 gross margin return on inventory (GMROI), 196–197 initial markup, 126–127 maintained markup, 131–132 markdown cancellation, 157–158 markdowns, 154 markup percent, 110–111 markup percent on group of items, 113–114 merchandise plan preparation, 239–241 net markdown, 157–158 net sales, 49, 52–54 open-to-buy, 261–262 percent base, 35–36 percent conversion, 29 percent increase/decrease, 37–38 percent rate, 32–33 percentage amounts, 31 performance measures, 60–62, 65–66 periodic reorders, 271–272 planning purchases, 235 planning sales, 218–219 planning stocks, 230–231 retail deductions, 177–178 Retail Inventory Method (RIM), 193–195 sales curves, 219 shortage, 180–181 skeletal statements, 49–50 stock turnover, 222–223 total merchandise handled, 177–178 transportation costs, 94–95 unit measure, 26 Prepaid shipping, 92 Prestige pricing, 143, 163 Price changes additional markups, 158–159 discounts, 159–162 markdown cancellation, 155–158 markdowns, 149–155 markup cancellations, 158–159 net markdowns, 155–158 types of, 149–159 Price consciousness, 145 Price lines defined, 146, 163 determining, 264 spread, 146 Price lining, 146, 163 Price points defined, 146, 163 spread, 146 Price range, 146, 163 Price zone, 146, 163 Prices establishing, 147–148 list, 82, 96 processing, 147–148 quoted, 81 right, for consumer, 145 right, for retailer, 145 vendors, 80 wholesale, 80, 96

index

315

Pricing above-the-market, 143, 163 at-the-market, 142–144, 163 competitive, 115, 142–144 errors, 149 everyday low (EDLP), 144, 162 factors affecting, 144–145 good value, 145, 152 handling costs and, 145 high-low, 144, 162 leader, 143, 162 manufacturer policies and, 144 policies, 142–144 prestige, 143, 163 process, 147–148 related to consumer demand, 146 retail, 141–171 selling costs and, 144 supply and demand and, 145 Private labels defined, 15 examples, 7 Product development in centralized merchandising, 8 defined, 15 Productivity defined, 56 human resources, 56 inventory, 56 space, 56 Profit. See also Loss achievement of, 3 formula, 46, 289 gross, 45 importance, 14 loss versus, 46 operating, 45, 46–47 retail pricing for, 141–171 Profit factors, 50–56 cost of merchandise sold, 54 expense control, 55 net sales, 50–54 operating expenses, 54 Profitability, 43–77 basic factors, 45–50 case study, 72–77 discussion questions, 77 inventory, 195 performance measures, 56 profit factors, 50–56 summary problems, 68–72 Profit-and-loss statement defined, 47, 68 discounts on, 160 example, 48 figure utilization, 47 Promotion codes, 160 Promotional allowances, 90, 96 Promotional markdown. See Temporary markdowns Promotional merchandise, 84 Provision quantity, 272 Purchases planning, 233–234 retail formats, 142 special, 150, 162

Q 316

Quantity discounts deduction, 82 defined, 82, 96 example, 82

index

Rate defined, 38 examples, 31–32 finding, 31–32 formula, 31 practice problems, 33–34 Rate of sale (RS), 268, 272, 288 Rebates allowances as, 90 defined, 90, 96 Receipt of goods (ROG) dating, 88, 95 Receipts, net, 175 Reducing fractions, 282 Reductions benefits, 233 defined, 123, 133 figures, 125 in initial markup, 123 in merchandise plan preparation, 236 planning, 233 Regular dating defined, 87, 95 example, 87 Reorder period (RP), 268, 269 Reserve (R), 268, 272 Retail deductions defined, 176 example, 176 practice problems, 177–178 types, 176 Retailing. See also Retail deductions; Retail Inventory Method (RIM); Retail price; Retail pricing defined, 5 Retail Inventory Method (RIM). See also Inventory valuation advantages, 190–91 calculation of approximate cost value, 186 calculation of closing book inventory, 186 calculation of cost and retail values, 185–86 calculation of cost percent, 186 calculation of gross cost, 186 calculation of total cost, 186 with computer spreadsheet, 190 cost percent, 190 defined, 183, 198 disadvantages, 190 examples, 184, 191–93 lower of cost or market value, 183 as merchandise management tool, 188 practice problems, 193–195 problem suggestions, 190–191 purpose, 208 step review, 184 steps, 183 Retail price averaging, 118–119 calculating when cost and markup percent are known, 109 establishing, 147–150 formula, 109 markup based on, 105–107 process, 147–148 total, 115 Retail pricing case study, 167–168 discussion questions, 167 factors affecting, 144–145 for profit, 141–172 related to consumer demand, 146 retail image and, 142–144 retail objectives and, 142

R

strategies, 142 summary problems, 163–166 Retail reductions. See Reductions Retail stores centralized merchandising, 8 decentralized merchandising, 10–11 merchandising division, 8–9 merchandising function, 7–8 organization, 8–11 organizational chart, 7 Retail value, converting to cost value, 234 Retailers primary goal, 5 right price for, 145 shipping charge reimbursement, 92 successful, 3 Retailing competition, 13 defined, 5, 14 objectives, 141 purchase formats, 142 purpose, 45 Return to vendor (RTV), 198 Robinson Patman Act of 1936, 81, 82 Rounding, 23

Sales. See also Markdowns figure analysis, 211 measurements, 13–14 organization, 151 percent increase/decrease, 211 planning, 211–218 relative importance, 313 season totals, 212 special, 150 Sales curves basic merchandise, 217 category, 216–217 defined, 213, 272 determining, 214–216 as dollar figure, 213 establishing, 214 examples, 213–214 expressions, 213 flat, 217 geographical location and, 215–216 as percent, 213 practice problems, 271 as ratio, 213 as unit of sale, 213 use, 255, 267 Sales per employee hour defined, 59, 67 example, 60 formula, 60 Sales per full-time employee equivalent defined, 60, 69 example, 60 formula, 60 Sales per linear foot of shelf space defined, 65, 67 example, 68 formula, 65 Sales per square foot defined, 63, 6 examples, 63, 64 formulas, 63, 64, 287 gross space, 63 as planning measure, 64 as productivity measure, 64 selling space, 65

S

Sales per transaction average, 58, 67 defined, 58 example, 59 formula, 59 Sales productivity method of space allocation, 64, 67 Sales promotion division, 12–13 Sales volume. See Operating income Seasonal basics, 264, 272 Seasonal discounts. See also Discounts defined, 84, 95 example, 85 Seasonal goods markdowns, 126 Seasonal merchandise Plan. See Dollar merchandise plan, six-month Selection factors defined, 263, 272 identifying, 266 Selling costs, 145 errors, 149 Selling cost percent defined, 57, 67 examples, 57 formula, 56, 288 Selling space defined, 63, 67 sales per square foot of, 63 Sell-through percent, 114 in price changes, 147–148 Services, 93 Shortages. See also Inventory amount, 178, 181 calculating, 178–180 cause, 178 defined, 178, 198 estimated, 181–182, 198 examples, 178–179 formula, 350 as major profit drain, 231 percent formula, 231 practice problems, 180–181 Shrinkage. See Shortages Skeletal statement complete, 47 defined, 45 percents, 47 practice problems, 49 SKU (stock-keeping unit), 266 Slotting allowances, 90, 96 Space allocation formula, 64 sales productivity method, 64, 67 Space productivity changes, measuring, 63 measurement, 56 sales per square foot, 63 Special purchases, 150, 162 Staple basics, 264, 272 Stock–sales ratio, 227–228. See also Stock turnover Stock turnover. See also Planning stocks average stock, 220–224 buyer influence, 224 calculating, at retail, 220–223 calculation at cost, 224 calculation by units, 223 defined, 56, 219, 272 department store, 225 examples, 220–221 formula, 220, 289

net sales in, 221 practice problems, 222–223 rapid rise, 224 rate, 224 significance, 224 stock-sales ratio comparison, 229 too rapid, 225 Stocking allowances. See Slotting allowances Stock-keeping units (SKUs), 266, 272 Stocks. See also Basics; Inventory actual on-hand, 259 average, 220, 243 basic, 225–227, 243 BOM, 220 EOM, 220 on hand, reducing, 258 on-order, 259 planning, 219–224 Stock-sales ratio calculating, 228 defined, 227, 243 example, 228 for fast-moving stocks, 225 formula, 228, 289 illustrated, 228 with known retail stock/sales, 228 median, 228 stock turnover comparison, 229 Street money. See Slotting allowances Subtracting decimals, 21 fractions, 282–283 Summary problems basic merchandising mathematics, 19 cost of merchandise sold, 96–98 dollar merchandise plan, 243–246 inventory valuation, 222–223 markup, 133–136 open-to-buy, 273–274 profitability, 68–72 retail pricing, 163–166 Supply and demand, 145

T

Taxes, figuring with percents, 27 Temporary markdowns, 155, 162 Terms communicating, case study, 99 defined, 84

net, 85 Total cost in averaging markups, 115 of goods sold, 109–110, 130, 289 Total merchandise handled, 196 cost percent, 185 cost/retail values, 185–185 defined, 175 example, 175 practice problems, 177–178 variables, 175 Total retail, in averaging markups, 115 Trade allowance, 90, 96 Trade discounts. See also Discounts defined, 82, 96 examples, 83, 84 functional discount as, 84 industrial users/wholesalers, 84 quoting, 83 as series of discounts, 83 Transactions defined, 67

inventory increase, 175 inventory reduction, 175 number of, 58 sales per, 59 Transportation cost examples, 92 in cost of merchandise, 54 costs, 91–93 FOB destination: charges reversed, 92, 96 FOB destination, 92, 96 FOB factory (FOB origin), 92, 96 FOB shipping, 92, 96 insurance costs, 91 negotiations, 80 practice problems, 94–95 prepaid, 92 types, 91

Unit average inventory formula, 290 Unit measure. See also Mathematics dozen, 25 practice problems, 26 use of, 25 Unit planning. See also Open-to-buy (OTB) defined, 262, 272 selection factors, 263 use of, 285 Units, 38 UPC (universal product code), 266

U

Value cost, 185–186, 234 good, 145 retail, 183–185, 234, 288 Vendors chargebacks, 152, 162 defined, 80, 96 factors and, 93 markdown money, 162 markdowns and, 162 prices, 80 services, 91 shipping cost reimbursement, 92

V

Weeks’ supply method. See also Planning stocks defined, 224, 243 example, 224 needed inventory, 224 Wholesale prices, 85, 96 Wholesalers merchandising by, 6 primary goal, 6 trade discounts, 84 Workroom/alteration costs, 124

W X

X-dating, 88, 95

index

317