You were hired by a group of investors to buy and merchandise accessories for their small, four-store chain of infant apparel shops, and you’re planning a buying trip to AmericasMart Atlanta (Atlanta Apparel).
This new product classification is to complement and reflect their prestigious, unique merchandise assortments, which are targeted toward upper-income mothers and grandparents looking for the unusual: Children’s World at Atlanta Apparel.
This new classification was introduced in the fall/winter period and was well received by their clientele. Although the projected sales goal was met, the profit performance was more than disappointing. After analysis of each market segment and location, your focus will be on the combined merchandise selection factors that form the basis of your ultimate selections suitable for your particular customer group. As a buyer, don’t forget that you often review buyer’s briefings from various forecasting resources such as the Worth Global Style Network(WGSN).
The pricing factor is one of the elements that is of major importance, as it is both significant and observable. Because of the relationship of pricing to gross margin, management has planned and set certain gross margin guidelines and limitations to ensure that the store achieves a more satisfactory gross margin. These figures are to be achieved while accomplishing the projected sales. As an incentive, you have been promised an additional bonus if you provide gross margin results that are an improvement over the following expected guidelines:
Gross margin 49.4% (42.4% expenses, 4% profit)
Markdowns: $660,000 (10%)
Shortages: $612,000 (2%
Opening Inventory: $150,000
Closing Inventory: $200,000
You are confident that with appropriate planning and forecasting you will be able to attain the results management wants, and the phantom bonus mentioned could become a reality for you.
Analyze the above problem. As you have learned, a key factor in gross margin control is the pricing of merchandise. In your initial post, answer the following:
- Since management already established a 47.4% gross margin, will advance planning of an initial markup help ensure a favorable gross margin? Yes or no? Why?
- Having calculated the initial markup, should you be able to determine the gross margin or maintained markup? What is to be gained by determining these two figures?
- Consider the decision-making process surrounding markups. Although you will focus on obtaining the desired markup percentage, you will also have to pay attention to the dollar markup. Why?
- Because the sales, markdowns, and shortages are projections, they could prove to be erroneous. Compute and compare how the dollar markup could give different results if the actual reductions increased to 13%. Should you aim for a higher initial markup to build a “cushion” to account for the unpredictable?