Modern Gross Profit Analysis

• Date: 01 May 2016
• Published date: 01 May 2016
• DOI: http://doi.org/10.1002/jcaf.22160
• Author: James B. Edwards

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© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22160

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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.

POSITIONING

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

deliveries.

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

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