Volume 51 Number 2 Summer 1975 A Diagrammatic Model for Merchandising Calculations MARVIN A. JOLSON Professor of Marketing University of Maryland College Park, Md. Retailing students and practitioners have been unable to successfully elucidate the relationships among the variables relevant to sound merchandising decisions. Traditional formulas used in retailing texts and handbooks have been limited in effectiveness. The visual approach presented in this article, while considering all elements of interest in the merchandising framework, substantially simplifies the retailer's calculation needs, The following markup calculation problem was mailed recently to a convenience sample of 64 retailing authorities including professors of retailing, journal writers in retailing, and department store merchandising and operating managers Assume that annual operating expenses for a retail store will average 30 percent of planned net sales. Markdowns have been planned at 7 percent and merchandise shortages at 3 percent. The planned net sales for the year are $4 million and a net profit of 8 percent for the year is desired. What markup in dollars and in percentage of original retail value should be planned for the year? Even though there was no time limit and the use of references and assistance was encouraged, only nine respondents computed the correct answers to both parts of the problem, When the problem and its solution were published in the Journal of Retailing,’ the author received more than one hundred letters commenting about the usefulness of the solution model. Moreover, many of those who wrote suggested that the model be enlarged to include situations involving cash discounts, transportation charges, alteration costs, and merchandise inventories. This article attempts to respond to these apparent needs of students, instructors, and practitioners in retailing. 1. Marvin A. Jolson, “Markup Calculations — Still a Fuzzy Area?”, Journal of Retailing, 49 (Fall 1973), 77-80; and Journal of Retailing, 49 (Winter 1973-1974), 93. Copyright © 2001 All Rights ReservedJournal of Retailing A number of treatments of merchandising arithmetic in popular retailing textbooks and handbooks have been examined and submitted by the author to undergraduate students of retailing. Students remain somewhat confused and the authors of these texts have encouraged the author to continue his efforts to clarify these retailing calculations on both classroom and in-store levels. CAUSES OF CONFUSION A primary problem is one of confused languages among retailers and instructors. Markup means initial markup to some retailers and maintained markup to others. Another group regards gross margin as a form of markup. Some retailers and authors compute markup as a percentage of merchandise cost while others use selling price as a base. When cash discounts, transportation charges, alteration costs, and opening and ending inventories are introduced, additional calculation difficulties arise. Textbook writers have attempted to unravel the confusion by offering a number of lengthy formulas that students are required to memorize. Although memorization of formulas has proved helpful during examina- tions, the relationships among the variables relevant in merchandising calculations remain fuzzy to many. SUGGESTED SOLUTION MODELS. The Basic Solution. The model of Figure 1 is a solution to the problem presented at the outset of this article. Since operating expense and profit percentages are given, line 5 may first be completed. Since gross margin is the sum of expenses plus profits, the cost of merchandise may be calculated and line 4 may be filled in. The latter value of $2,480,000 may now be transfered to line 1. Original retail value (line 2) is the sum of all the items in line 3. Therefore, when the cost of merchandise is subtracted from original retail value, markup in dollars (line 1) is calculated to be $1,920,000. Markup as a percentage of original retail value is $1,920,000/$4,400,000 or 43.6 percent. WHEN CASH DISCOUNTS AND ALTERATION COSTS ARE GIVEN Determine the initial markup percentage in a men’s clothing store that has the following planned figures for the spring season:Merchandising Calculations Net sales $200,000 Net profit $ 7,000 Operating expenses $ 60,000 Alteration costs $ 3,000 Markdowns, employee $ 10,000 discounts, and shortages Cash discount 2% of invoice price FIGURE 1 Visualization of Markup-related Variables and Problem Solu- tion 56.4% 43.6% cost of merchandise * initial markup 1 $2,480,000 | $1,920,000 110% 2 original retail value 7 396] 100% 3, markdowns — shortagest planned sales $280,000 $120,000] $4,000,000. 62% 38% 4 cost of merchandise, _gross margin $2,480,000 $1,520,000 a wi . expenses , profit : $1,200,000 [320,000] * Consists of invoice cost + inbound transportation charges ~ cash dis- counts + workroom or alteration costs. + When applicable, other reductions such as employee discounts should be included. Additional Notes All percentages use planned sales as a base except for those in line 1 which are based on original retail value. Values given in problem are shown in boxes such as All other values were calculated. SOURCE: Marvin A. Jolson, “Markup Calculations—Still a Fuzzy Area?”, Journal of Retailing, 49 (Winter 1973-1974), 93. Repro- duced with permission. Copyright © 2001 All Rights ReservedJournal of Retailing ‘These are the steps in the solution shown in Figure 2 1, All given values are entered in lines 3, 4, and 5. 2. The gross margin of $67,000 is found by adding operating expenses ($60,000) and net profit ($7,000). 3. Line 2 (original retail value of $210,000) is found by summing all values in line 3. 4. The cost of merchandise (C = $130,000) in line 4 represents the net cost of merchandise paid to vendors after the deduction of cash discounts. This value may be transferred to line 1. 5, Since the net cost of merchandise (C) plus cash discounts (CD) equals the invoice cost of merchandise (C;), Se $130,000 + .02 C, = Cj C, = $132,653 Therefore CD = $132,653 — $130,000 cD 2,653 6. Initial markup (MU) in line | is found as follows: MU = Original retail value - C — CD MU = $210,000 — $130,000 — $2,653 = $77,347 7. MU% = MU/ORV = $77,347/$210,000 = 36.8% The solution models of Figures 1 and 2 differ in that in line 1 of the latter figure, the invoice cost of merchandise purchased has been divided into actual cost of merchandise paid to vendors and cash discounts earned by the purchaser; in line 4, alteration costs have been included as part of “cost of goods sold.” When cash discounts and alteration costs are not considered, Figures 1 and 2 are identical. WHEN OPENING AND ENDING INVENTORIES ARE INVOLVED Consider the more complex problem of determining gross margin and net profits when opening inventory, ending inventory, cash discounts, trans- portation charges, and alteration costs are considered. A ladies apparel shop accumulates the following data for the first fiscal quarter of 1974 6 ee ee eC“???Merchandising Calculations Opening inventory (at cost) Invoice cost of new merchandise Freight-in charges Initial markup Total retail reductions Ending inventory (at retail) Alteration costs Operating expenses Net sales Cash discounts. $100,000 $150,000 $ 4,000 39.52% $ 20,000 $ 70,000 $ 3,233 $ 60,000 $330,000 2% of invoice costs FIGURE 2 Solution Model when Cash Discounts and Alteration Costs Are Given c cD MU 1 | $130,000 $2,653 $77,347 ‘ORV 2 $210,000 R Net Sales 3 | Si0.00} | [$200,000 c cM 4 $130,000 _ | [3,000 $67,000 Code AC x 7 [$60,000] $7,000) C = Net cost of merchandise paid to vendors after the deduction of cash discounts CD = Cash discounts realized MU = Initial markup ORV = Original retail value R = Retail reductions (markdowns, shortages, employee discounts) AC = Alteration or workroom costs GM = Gross margin X = Operating expenses r= Net profit Note Values given in problem are shown in boxes. All other values were calculated. Copyright © 2001 All Rights ReservedJournal of Retailing FIGURE 3 Solution Model when Opening and Ending Inventories Are Given [29 G32) ih c cD T MU 1 | [$100,000] |s147,000} $3,000 | [$4000 $166,000 ORV 2 $420,000 R i NET SALES 3. | [$20,000] | ($70,000 $330,000 com ,_Ac cM a $208,664 ||$3.233) $118,103 " _ ] $60,000} | $58,103 Code Ig = Opening inventory (at cost) C= Net cost of merchandise paid to vendors after the deduction of cash discounts CD = Cash discounts realized Transportation-in charges MU = Initial markup ORV = Original retail value Retail reductions (markdowns, shortages, employee discounts) nding inventory (at retail) COM = Cost of merchandise sold AC = Alteration or workroom costs GM = Gross margin X = Operating expenses 1 = Net profit Note Values given in problem are shown in boxes. All other values were calculated.These are the steps in the solution shown in Figure 3: 1. Fill in all given values. 2. Fill in value of original retail value (line 2) which is the sum of all values in line 3. 3. Calculate initial markup in dollars (.3952 X $420,000 = $166,000). 4. Find cash discounts earned and enter in line 1 (,02 X $150,000 = $3,000). 5. Find net cost of new purchases and enter in line 1. This is invoice cost minus cash discounts taken ($150,000 — $3,000 = $147,000). 6. Calculate cost of merchandise sold (not including alteration costs) and enter in line 4. This is, Opening inventory + net purchases + transportation costs — complement of the percentage markup X ending inventory (at retail), ie, $100,000 + $147,000 + $4,000 — .6048 X $70,000 = $251,000 — 42,336 = $208,664. 7. Calculate gross margin and enter in line 4. This is found by adding alteration costs to the cost of merchandise (step 6) and subtracting both from net sales. 8. The profit value is found and entered in line 5 by subtracting operating costs from gross margin. It may be observed that Figure 3 is the general solution model for all of the situations illustrated in this article. When opening and ending inventories are zero, the models of Figures 2 and 3 are identical; when cash discounts, freight charges, and alteration costs are also omitted, the models of Figures 1 and 3 coincide. The general model is particularly helpful when the retail analyst or accountant seeks to employ the retail method of inventory valuation. CONCLUSION The method of this article clarifies the relationships among the variables relevant in retail merchandising calculations and is offered as an aid to retailers, students, and instructors. The diagrammatic mode of the (Continued on page 92) 9 Copyright © 2001 All Rights ReservedJournal of Retailing A Diagrammatic Model for Merchandising Calculations (Continued from page 9) technique differentiates it from the approach of most authors who use traditional formulas such as Expenses + profit + alteration costs + reductions — cash discounts initial markup = : Sales + reductions The approach simplifies markup calculations, assists the retailer in integrating the various merchandising activities involved in matching purchase requirements with sales estimates, planning model stocks, valuing inventories, analyzing retail operations, and generally controlling retail performance. The end purpose of the method is to improve the retail firm’s planning and control system by improving the processing of meaningful internal information for the purpose of decision-making. The Frightened Consumer? (Continued from page 37) shoppers may be slightly more sensitive to additive dangers than the younger and older shoppers. Sensitivity to additive dangers may increase in the future, even in the face of distracting inflation, as new threats are uncovered and exposed through the mass media. There may be increasing opportunities to feature foods free from known chemical additives at market-plus prices. Super- market operators in high-income areas may have greater success with such pure foods because of the indicated correlation of safety sensitivity with income and education. Certainly, in this age of “consumerism,” there is a need for more research measuring consumer reaction to food and cosmetic danger publicity. This exploratory study indicates at least a noticeable consumer response to additive dangers and suggests hypotheses about response as related to income, education, and age. Response may also vary between races, social classes, life cycles, geographical locations, occupa- tions, and other socioeconomic factors. Millions of dollars have already been lost because of ballooning publicity about a nonessential ingredient. The “additive decision” is made by too many firms today with too little information on possible consumer reaction 2 ON OT rr |— =r