Modern Gross Profit Analysis

Date01 May 2016
Published date01 May 2016
© 2016 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22160
Modern Gross Profit Analysis
James B. Edwards
Note from the edi-
tor: Because this
article was written by
the editor of JCAF,
it was reviewed by
an independent
senior editor (non-
JCAF ) and edited by
assistant editors of
another independent
journal in the field of
management accounting. This
article underwent a major revision
and two smaller improvements
recommended by independent
peer reviewers.
Many merchandisers are
juggling inventories in response
to the forces affecting product
pricing, cost of goods sold, vol-
umes, and shifting product mix.
That is, gross profits are needed
to support operating expenses,
income taxes, and net earnings.
In some businesses, the right
combination of prices, prod-
uct costs, and availabilities at
the right moment is becoming
ever more elusive. This usually
results in under- or overstock-
ing; thereby, creating unrecover-
able costs and/or lost opportu-
nity costs that erode earnings.
In competitive environ-
ments, managers must make a
fundamental decision concern-
ing their organization’s posi-
tioning itself within their market
setting and in comparison to
competitors. Merchandisers
must have the right products
available at the right moment
at the right prices. This must be
accomplished without exces-
sive costs and value expirations
(inventory write-downs and
write-offs) due to excessive
amounts of inventory. Inven-
tory shortages may result in
lost sales opportunities or
reduced profits due to the
additional costs of expediting
When markets become
more competitive (or when
products lose their competi-
tive advantage), a business
must reduce selling prices to
maintain market share. Under
such conditions, businesses
may not be able to cover these
revenue reductions through
corresponding reduc-
tions in product costs
such that margin
rates are protected.
Even when the
margin rates are
protected, the total
amounts of gross
profits fall unless the
product(s) is (are) at
least unitary.
Within the arena of pure
competition, where no players
have a competitive advantage, a
business must be able to sustain
a position of competitive par-
ity just to remain in the market.
Sales mix analysis is
important in multiple-product
and service organizations.
Management should be just
as concerned with the mix of
products or services as with
the total unit or dollar sales
volume. A shift in the sales
mix can have a significant
impact on earnings. Profits
may decline, even when sales
volumes increase. Conversely,
profits may increase, even when
sales volumes decline, if the
mix shifts toward products or
services with higher margins.
For example, assume that
Retailers, Inc. sells two kinds
Merchandise retailers such as Walmart, Costco,
and Target routinely track product margins to
assist operating managers in making local stock-
ing and pricing decisions. This article shows how
to penetrate product margin behavior based on the
price sensitivity of customers and shifts in product
mix. © 2016 Wiley Periodicals, Inc.
Editorial Review

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