Based on the given scenario, what can be done to ensure that the gross margin goals for the business are met?
A 150-year-old Midwestern 400-store chain offers moderately priced ladies apparel. It serves the urban market and the average customer is 34 years old. The new sweater buyer for the store chain, Candy Kaslow, reviews last year's fourth-quarter sales and realizes that a then-emerging trend, cable knit sweaters, underperformed when compared with the planned numbers.
Candy's merchandise sales reports includes the following information:
Cable Knit Sweaters:
- Cotton blend (40 percent cotton, 60 percent acrylic)
- Made in the US
- Dry clean only
- Styles: Crew Neck and Turtleneck
- ¾-length sleeve
- Size: 10
- Silhouette: Close fitting to the body, waist length
- Retail selling price: $85.00
- MU Goal: 60 percent and actual MU: 63 percent
- GM Goal: 43 percent and actual GM: 38 percent
Candy has to start the planning process for next year's fall/winter product assortment plan. Carolyn Strong, the division's trend manager, urges her to include cable knit sweaters in the assortment for the next season because other retailers apparently experienced better sales performance on this merchandise during the prior year.
I assume that you are asking about the gross margin goals with regard to these sweaters. If so, there are two ways to try to ensure that the gross margin goals for the company will be met. One option is to raise the price of the sweaters. The other is to reduce the costs associated with selling the sweaters.
To understand why this is so, let us first look at the idea of gross margins. Gross margins are typically calculated by dividing the profit made on the sale of the good by the total revenue gained by selling it. The profit is found by subtracting the direct cost of the good from its sale price. So, let us imagine that we sell a product for $10 and it took $6 to make the product. Our total revenue is $10 (if we sell one unit) and our profit is $4 (the $10 we sold it for minus the $6 it cost). We would divide $4 by $10 and get a gross margin of 40%.
What this tells us is that we can only increase our gross margin in two ways. We can increase our price, thereby raising our revenue. We can lower our costs, thereby raising our profit. We can try to do both at the same time. Any of these options will increase our gross margin.
Therefore, this firm needs to either A) increase the price of the sweaters, B) reduce the cost of making (or buying) them, or C) do both A and B.
Gross margin (GM) is calculated by dividing gross profit by net sales. In order to meet GM goals, the gross profit must be calculated to find the level at which net sales will result in the targeted profit.
GM = gross profit (targeted goal) / net sales (quantity needed)