Planning Profit

Basic Concepts

• Cost : Amount the retailer pays for purchases.• Retail :Price at which stores offer merchandise

to the customer.

Basic Profit Factors• Operating Income : Also known as sales volume, it

indicates how much merchandise has been sold in Dollars.

• Cost of Goods sold : Amount paid for the goods sold after adjustment of Cash discounts, inward freight and alteration or workroom costs.

• Gross Margin : Difference between net sales and total cost of goods sold.

• Operating Expenses : Expenses ,other than the cost of goods , incurred in the buying/selling process.

• Net Operating Profits :Difference between Gross margin and operating expenses.

Elements of Basic Profit Factors

• Gross Sales =Total of all the prices charged to consumers on individual items X Number of units actually sold

• On Monday, a department store sold 30 dolls priced @ $15 each, 25 dolls @$25 each, and 5 dolls @ $30 each. What were the gross sales for that day.

Elements of Basic Profit Factors

Dollar Customer Returns and Allowances = =Total of all refunds or credits to the

customer on individual items of merchandise X No. of units actually returned

Customer Returns and Allowance % = (Customer Returns and Allowances X 100) /gross sales

Elements of Basic Profit Factors

• On Saturday, a store refunded $98 for one jacket, $75 each for two woolen skirts, and $55 each for two tops. Other returns of the week amounted to $400, and the weekly total of allowances given was $57.What was the dollar amount of customer returns and allowances? What was the customer returns and allowances percentage if the gross sales were $20,375 during the week.

Elements of Basic Profit Factors

• Net Sales = Gross Sales-Customer returns and allowances

• Department’s net sales % of total store’s sale = =(Department’s net $sale/Store’s net $ sales)X 100 A house wares department sold $65,000 worth of

merchandise . Customer returns were $6,500.What were the net sales of this department? If the total store sales were $45,000,000 for the same period, what was the department’s net sales percentage of the total store’s net sales?

Elements of Basic Profit Fact

• Gross Sales=(Net sales X 100)/(100%-customer returns& allowances %)

• The net sales of department were $460,000.The customer returns and allowances were 8%.What were the gross sales of the department?

Elements of Basic Profit Fact

• Total cost of merchandise sold = Billed cost + Inward transportation charges + Workroom costs-cash discounts

• Gross Margin = Net sales-Total cost of goods sold

Operating Expenses• Direct Expenses : Salespeople’s & buyer’s salaries Traveling expenses Advertising Rent• Indirect Expenses : Maintenance Insurance Security Depreciation Salaries of senior executives

Operating Expenses

• Operating Expenses=Direct Expenses + Indirect Expenses

• Net Operating Profit=Gross Margin-Operating Expenses

Evaluating A Buyer

• Sales Results :Measured in dollars, by units, number of transactions, sales per square foot of selling space.

• It indicates how well the merchandise has been accepted, priced and sold.

• Buyers are expected to achieve planned sales goals based on the reasonable appraisal of both inside and outside conditions and trends.

Evaluating A Buyer

• Inventory Results : Stock Turns(sales/avg. stock), merchandise shrinkage as per industry standards.

• Margin Results :Pricing merchandise at a profitable initial markup, realising planned gross margin.

• Net Operating Profit Results : Gross Margin-all expenses chargeable to the selling department .

• Daily buying, pricing and stock control activities.

Usage of profit and loss statement from the perspective of a merchandiser

Skeletal Profit and loss statement

• It does not spell out all transactions in detail but is a quick method to determine any given department’s profit and loss.

• It contains the five major components of Profit and loss statement and is expressed in both dollars and percentage.

Skeletal Profit and loss statement

• Net Profit=Net Sales-cost of goods sold-operating expenses.

• Cost of goods sold%= (Cost of goods soldx100)/Net Sales

• Gross Margin%= (Gross MarginX100)/Net Sales

• Operating Profit %=( Operating ProfitX100) /Net Sales

• Net Profit%=(Net ProfitX100)/Net Sales

Skeletal Profit and loss statement

• The juniors department in store A had net sales of $1,60,000;the cost of goods sold was $88,000 and operating expenses were $64,000.The juniors department in store B for the same business period, had the net sales of $2,60,000;the cost of goods sold was $1,35,000 and operating expenses were $1,09,200.Which store earned a higher net profit percentage?

Final Profit and loss statement• It includes additional information pertaining to

stock levels calculated at cost.• Opening inventory-Merchandise in stock at the

beginning of the accounting period.• Closing inventory-Merchandise in stock at the

end of the accounting period.• Total merchandise handled=Opening inventory +

cost of new purchases + inward freight.• Gross cost of goods sold=Total merchandise

handled-Closing inventory