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Successful Service Department ManagementCourse 3: Increasing Gross Margins

A Management Series for Supermarket Deli, Bakery and Cheese Department Managers

Course 3: Increasing Gross Margins

Successful Service Department ManagementA management Series for Supermarket Deli,

Bakery, and Cheese Department Managers

PO Box 5528Madison, WI [email protected]

First Edition

© 2011, International Dairy•Deli•Bakery Association™

No part of this publication may be altered without the express written permission of the International Dairy•Deli•Bakery Association.

The information presented in this book has been compiled from sources and documents believed to be reliable. However, the accuracy of the information is not guaranteed, nor is any responsibility assumed or implied by the International Dairy•Deli•Bakery Association.

© 2011 International Dairy•Deli•Bakery Association™ i

About Th is Series

Th e Successful Service Department Management series has been designed specifi cally for deli, bakery, and cheese department managers. Its purpose is to provide you with the information you need to manage your depart-ment successfully.

Whether you are a newcomer to management or an expe-rienced veteran, this educational series will help you gain knowledge of the workings of your department.

Th is series is divided into seven courses:

• Course 1: Understanding the Concept of Profi t

• Course 2: Sales and Merchandising

• Course 3: Increasing Gross Margins

• Course 4: Controlling Inventories

• Course 5: Managing Direct Expenses

• Course 6: Developing a Profi t Center Team

Successful Service Department Management includes six courses, a Final Quiz, a Final Quiz Answer Key, and an Associate Tracking Tool.

As you work through this series, you’ll fi nd:

Exercises

Answer Keys

Skills Enrichment Activities

Links to FREE Job Guides at IDDBA’s Web site

How To Get Th e Best Results

Th is Successful Service Department Management training series has been designed for you to take all six of the courses from start to fi nish or to choose course subjects based on your needs. To get the full benefi t of the series we recommend that you take one course per week in the order we’ve provided and complete the Skills Enrichment Activities (SEA). However, you can customize this based on your available training time, what works best for you, and the needs of your business.

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What You’ll LearnWhat You’ll Learn::• How to determine profi t, margin, and gross

margin for your department’s products and for your department.

• How to use merchandising techniques to increase sales in your department.

• To explain where shrink comes from and how to reduce it in your department.

• How to write an eff ective order for your department.

• To read a department profi t & loss state-ment knowledgeably.

• To write a department schedule that maxi-mizes customer service and profi tability.

• How to build employee motivation through training and communication.

Successful Service Department Management Series

ii © 2011 International Dairy•Deli•Bakery Association™

Successful Service Department Management

Skills Enrichment Activities

Th e Skills Enrichment Activities are at the end of each course. Th ey will help you further your professional development by giving you a chance to apply the knowledge and skills you’ve learned in each course. Using information unique to your department, the SEA process will give you insight that could impact department profi tability and prompt you to make new management decisions. It will also help you examine new ways to motivate and inspire your team. You may choose to do one, several, or all the enrichment activities.

IDDBA Job Guides for Department Associates

Some of the concepts and skills you learn will be helpful for your department staff to know. Aft er all, an inspired, moti-vated team is one of the best investments you can make in your pursuit to greater profi tability and customer engagement. Th ese free, downloadable IDDBA Job Guides cover topics like Understanding Profi t, Reducing Shrink, the G.R.E.A.T. salesmanship model, etc. Use them during on-the-job training and coaching sessions.

Progress Record

Use this Progress Record to keep track of your course and exam completions.

Course Name Completion Date Skills Enrichment Activities Completion Date Job Guides Used ✓

Course 1: Understanding

the Concept of Profit

A: Category Profit AnalysisUnderstanding Profit

B: Department Operating Report

Course 2: Sales

and Merchandising

A: Store Display Test Capturing Impulse Sales with G.R.E.A.T. Success

B: Plan an In-Store Promotion Sign Management and Effective Communication

Course 3: Increasing

Gross Margins

A: Generating Profit by Increasing Prices

B: Generating Profit by Promoting High-Margin, Slow-Moving Items

C: Generating Profit by Determining Which Categories Should be Promoted

Course 4:

Controlling Inventories

A: Analyzing Ordering Methods

Reducing ShrinkB: Ordering for a Difficult Category

C: Analyzing Mark-Downs

D: Analyzing Other Sources of Shrink

Course 5: Managing

Direct Expenses

A: Tracking and Creating an Hourly Sales History

B: Creating a Task List

C: Creating a Daily Assignment Schedule

Course 6: Developing a

Profit Center Team

A: Improving the Interviewing and Orientation Processes

B: New-Hire Questionnaire

C: On-Going Positive Feedback Challenge

Final Quiz

© 2011 International Dairy•Deli•Bakery Association™ 3

Increasing Gross Margins

In the fi rst two courses in this series, we have seen how sales drive the overall profi tability of the department. We’ve also looked at how merchandising can increase sales and profi ts.

In this course, we’ll look at another way to increase profi t-ability — by adjusting gross margins (or gross profi t per-centages) so that we generate more profi t from our sales.

As you recall, the gross margin is determined from gross profi t — it is the diff erence between the retail price and the cost of an item or group of items, expressed as a percent of sales. Th e greater the diff erence between the cost and retail, the greater our profi t margin.

Basically, there are four ways to increase our gross profi t margin. We can:

• Raise prices

• Buy products for less

• Change the margin mix

• Reduce inventory shrink

Th e fi rst three we’ll cover in this course. Th e fourth, reduc-ing inventory shrink, will be covered in Course 4.

How Raising Prices Aff ects Gross Margins

Let’s look fi rst at the pros and cons of raising prices as a way of improving our margins and generating more gross profi t. Even though pricing may be controlled by others in your organization, it is important to understand the factors involved.

One seemingly easy way to increase your overall margin in your department is to raise prices. If the cost of a prod-uct remains the same and you sell it for more money, you have generated more profi t dollars and improved your profi t margin.

Th e problem is that when prices go up, sales tend to go down. (Of course, the actual impact of a price increase will vary with the item and the price.) Th e question is, if we are


What You’ll LearnWhat You’ll Learn• How Raising Prices Aff ects Gross Margins

• How Purchasing Aff ects Gross Margins

• How Product Mix Aff ects Gross Margins

• How Ad Items Aff ect Gross Margins

4 © 2011 International Dairy•Deli•Bakery Association™


making more money on each item, by how much can sales go down before we lose all the extra profi t we generated from the price increase?

To answer that question, look at the example on this page.

From this example, it may seem that raising prices is a great way to improve profi ts! However, there are two important factors to be taken into account:

• Consumers’ price awareness

IDDBA research shows that price is more important to many consumers than brand. When prices go up, your customers will notice. Although they may not know exactly how much the increases are, they’ll consider the relative value of the products compared to similar products elsewhere. If they decide that too many items are out of line, they may well switch to another store or start buying similar items in another department, such as frozen foods.

Keep in mind the overall economic climate. Customers will be even more price sensitive in times of eco-nomic uncertainty.

• Competition

Th e intense level of competition among retail stores, and among retail formats, makes it easier than ever for consumers to switch stores when they feel prices are too high.

In areas with several stores close at hand, customers may decide to use your department for specials only, while shopping another store for most of their purchases. Th is can set up an ongoing cycle of raising prices to cover shrinking sales — a practice that is usually ruinous.

As you see, price increases may not always be the best alternative for increasing gross profi t. Before any price change is made, it must be carefully considered in light of consumer awareness and competitive pricing.

E X A M P L EE X A M P L E

How much can sales go down before we lose all the extra profit we generated from the price increase?

If we have an item that costs $1.00 and sells for $1.50, the mark-up is $0.50. If sales are 60 units a week, the gross profit from this item is $30.00 per week.

Mark-up × Units = Gross Profit

$0.50 × 60 = $30.00

The equation can also be expressed in terms of units:

Units = Gross Profit ÷ Mark-up

If the price is raised to $1.60 (an increase of over 6%), the mark-up will be $0.60 per unit.

Units = $30.00 ÷ $0.60

At $0.60 mark-up per unit, we now have to sell only 50 units a week to make the same $30.00 of gross profit.

With an over six percent price increase, sales could decline almost 17% and we would still make the same amount of gross profit.

Skills Enrichment Activity A: Generating Profit by Adjusting Prices and Item Promotion



How Purchasing Aff ects Gross Margins

Let’s look next at the advantages and disadvantages of buying products for less to improve gross margins. Again, even though the buying function may be done by others in your organization, there are some important principles you need to understand.

Th e second way to increase the gross margin on any item is to buy it for less. It is easy to see that if the cost of an item goes down while the selling price stays the same, you end up with a better profi t margin and more profi t dollars.

Suppliers periodically make special off ers to their customers in the form of discounts, allowances, deals, etc. You may be able to take advantage of these special off ers.

Oft en these special off ers are quite appealing. It can be tempting to stock up to take advantage of the lower price. But there are several things to consider before you order.

• How fast does the product normally sell?

What is the average rate of turnover? Remember, gross profi t depends on how fast an item sells. A high margin will not return extra profi t dollars if the item sits in your cooler.

Overordering slow-selling merchandise is a common problem in many departments. It can be a major reason a department might suff er from a lower-than-expected gross margin.

• How do you plan to promote the item?

Buying new items, seasonal items, or even larger quantities of everyday merchandise, can make good sense, if the items sell fast enough to off set the cost of the purchase.

A good way to capture the extra margin on a special purchase is to promote the product with signs, sampling, and special displays.

• What kind of advertising support is planned for this item?

Oft en, major advertising promotions are planned around new or seasonal items, which can increase movement signifi cantly.

If the item will be advertised in the newspaper or on TV and radio, customers will probably be asking for it, so it is wise to order adequate stock to cover the anticipated increase in demand.



As you can see, making the best use of a manufacturer’s price reduction means ordering products that will sell within a reasonable time. Buying slow-selling merchandise only shrinks your profi t margins and reduces your profi t dollars.

Perhaps a more eff ective way to increase profi t margins is to change your product mix, the ratio of high profi t items to low profi t items, so that you are sell-ing a larger percentage of high profi t items. We’ll look at that strategy next.

How Product Mix Aff ects Gross Margins

Th e gross margin for an entire department is made up of the margins on all the individual items you sell. Th is means that your department’s gross margin will increase or decrease in relation to the type of products you sell.

In other words, if you sell more high profi t merchandise, you generate more profi t dollars, which makes your profi t margin go up. If you sell more low profi t merchandise, you generate fewer profi t dollars, which makes your gross margin go down.

So, how can this information help you generate more profi t in your depart-ment? To answer that question, we need to consider the concept of contribution to margin.

Contribution to Margin

Contribution to margin is the percent of profi t that any item (or group of items) contributes to the gross margin. Th e formula for calculating contribution to margin is:

% Total Dollar Sales × Margin = Contribution to Margin

Contribution to margin can be calculated for items within a product category or for product categories within the department. To fi nd the percent of dollar sales for a category, simply add the sales of the individual items in the category, then divide by the total category sales. To fi nd the percent of margin for the category, average the margins for the individual items in the category.

To see how calculating contribution to margin can be helpful, look at the examples on the next page.




Calculating contribution to margin

Category % of Total Dollar Sales × Avg. Margin % for Category = Contribution To Margin %

Salads 24% 30% 7.2%

Cheeses 15% 50% 7.5%

Sandwiches 20% 55% 11.0%

Sliced meats 30% 50% 15.0%

Prepared foods 11% 55% 6.1%

Total department 100% 46.8%

In this example, we see that this deli is making a 46.8% profit margin this period — the sum of the margins for the five product categories. If our target profit margin for the deli is 48%, our profits are below expectations.


Improving profi t margin by changing product mix

Notice that salads have the second highest sales (24%) but the lowest average margin (30%). That means that although we sell a lot of salads, they contribute a fairly low percent of profit to the deli. Notice also that prepared foods have one of the highest profit margins, 55%, but the lowest percent of sales in the department (11%).

Now look what happens if we increase the sales of our prepared foods and decrease our salad sales a bit.

Category % of Total Dollar Sales × Avg. Margin % for Category = Contribution To Margin %

Salads 20% 30.00% 6.00%

Cheeses 15% 50.00% 7.50%

Sandwiches 20% 55.00% 11.00%

Sliced meats 30% 50.00% 15.00%

Prepared foods 15% 55.00% 8.25%


By changing the mix of products we are selling, our gross margin has jumped 0.95 percentage points. As you can see, calculating your contribution to margin can be an important way to analyze what you are selling.



But how can you actually change what you are selling? As we learned earlier, one signifi cant way is through eff ective merchandising:

• Placing high-margin impulse items in highly visible locations.

• Tying in high-profi t merchandise with low-profi t items.

• Promoting popular high-profi t items using in-store promotions.

• Creating eff ective signs to promote high-profi t items, etc.

While merchandising is one crucial way to change the mix of products you are selling, another important way to improve your mix is through multiple tiering — that is, off ering several diff erent brands of the same type of product.

Consider how this works with a popular item like sliced ham. By off ering a range of styles — for example, cooked ham, smoked ham, honey cured ham, and prosciutto — you off er four diff erent choices and four diff erent price ranges for the customer to choose from.

Th e odds are that at least a portion of your customers will choose a ham with a higher profi t margin, especially if you use suggestive selling and sampling to show them new alternatives.

Carrying a wider selection of diff erent priced brands gives your department greater appeal to a broader cross-section of customers, and improves your gross margin in the process.

▶

Skills Enrichment Activity B: Generating Profit by Promoting High-Margin, Slow-Moving Items

Skills Enrichment Activity C: Prioritizing Category Promotion to Increase Gross Profit



Exercise 1: Generating Profit by Increasing Gross Margins

Directions: Answer the following questions to see how much you’ve learned about gross margins and how to calculate them.

1. You have just made a price increase on an item — from $1.89 to $1.99. The cost has stayed the same — $1.09.

At $1.89, you were selling 50 units a week, making $40 in profit. At the new price of $1.99, how much do you need to sell to make the same amount of profit?

2. You are concerned that your department’s gross margin is lower than expected. To find out why, you’ve decided to analyze the mix of items you are selling.

Using the percents of sales and average profit margins listed below, determine:

• The contribution to margin of each product category

• The total gross margin for your department.

Category % of Total Dollar Sales Avg. Margin % for Category Contribution To Margin %

Breads/Rolls 27% 50% __________

Breakfast Bakery 21% 48% __________

Cakes 20% 65% __________

Pies 10% 60% __________

Cookies 8% 59% __________

Total department 100% __________

3. Based on your analysis in question 2, which product categories show the best potential for increasing the overall profit margin of the department?

Answer Keypage 15



How Ad Items Aff ect Gross Margins

Ad items can present a particular chal-lenge to maintaining acceptable profi t margins in your department. As we learned earlier, advertising popular items at reduced prices is a proven way to build sales and attract new custom-ers. It can also be an expensive way to bring in customers if special measures are not taken to compensate for the reduced price.

To see what we mean, take sliced bologna as an example.

• Let’s say you are running a special ad on bologna for $2.99 lb., $2.00 off regular price, at a cost of $2.49 lb.

• Ordinarily, you would make $2.50 lb. in profi t when bologna sells at $4.99/lb. — a 50% margin. During the sale, however, if the cost is still $2.49 lb., you will make $0.50 per pound in profi t — a margin of only 16.7%.

$2.99 − 2.49 = $0.50 mark-up

$0.50 ÷ 2.99 = 0.167 or 16.7% margin

It is easy to predict what will happen to the overall gross margin in the department as a result of this sale. However, if we are able to buy the bologna for less, the numbers change signifi cantly. For example:

• Let’s assume we are able to buy the bologna for $1.99 lb. on a special deal from the manufac-turer. If we still sell the bologna for $2.99 lb., we are now making $1.00 per pound in profi t — a 33.4% margin.

$2.99 − 1.99 = $1.00 mark-up

$1.00 ÷ 2.99 = 0.334 or 33.4% margin

As you can see, eff ective buying is a primary way to improve overall profi tability when promoting ad items. It is the buyer’s job to obtain the best possible deal on any product promotion.

As a Manager in your organization, you may not be able to buy directly from the vendor. Within your store, however, there are other things you can do to increase your margins on ad items.

Th e fi rst is to increase the turnover of the ad item. To see how turnover can aff ect your profi t, let’s go back to our example of the bologna.



• We’ve bought the bologna on deal for $1.99 lb. and are selling it in the ad for $2.99 lb., making $1.00 lb. in profi t.

• If we usually sell an average of 50 lbs. of bologna per week at a mark-up of $2.50, we would normally make $125 in profi t.

$2.50 × 50 = $125

• At a mark-up of $1.00 lb., however, we will now have to sell 125 lbs. of bologna to make the same amount of profi t — 2½ times as much.

$125 profi t ÷ 1.00 mark-up/lb. = 125 lbs.

As this example shows, one of the main ways to generate adequate profi t from ad items is to increase your turnover by selling more product. Even though we are making less on each item, the more items we sell, the more dollars we bring in.

Of course, to sell more items requires the right merchandising — creating high impact displays that can generate a lot of impulse sales.

One last way to bring up the gross margin generated by a low-profi t ad item involves another merchandising technique we’ve already mentioned — the tie-in promotion.

Let’s see how tying in high-profi t merchandise with an ad item can improve our margin, using the bologna example:

• Let’s assume we have tied in cheddar cheese with our display of bologna. Th e cheddar cheese sells for $3.99 lb. and costs $1.99 lb., that’s a mark-up of $2.00, resulting in a 50.1% margin.

$2.00 mark-up ÷ 3.99 selling price = 0.501 or 50.1%

• During the sale we sell 100 lbs. of bologna. We also sell 45 lbs. of cheddar cheese, 15 lbs. more than normal.

• Although we only made $100 in profi t from our bologna — $25 less than normal — we made an additional $30 from the cheddar cheese, which more than off sets the lost profi t from the bologna.

$2.00 mark-up × 15 lbs. = $30 profi t

As you can see, the way to generate more gross profi t from low-profi t ad items is through merchandising — selling enough extra product to make up for the lower margin, and/or tying in high-profi t merchandise to build extra gross profi t around the ad item.



Exercise 2: Ad Items

Directions: Try the following problems to see how much you’ve learned about calculating ad items.

1. Next week’s ad features cinnamon raisin bread at a hot price: $0.99 per loaf instead of the everyday price of $1.69. Normal-ly, this bread costs the bakery $0.79 per loaf, but thanks to a manufacturer’s allowance, the cost was reduced to $0.69 each. Now, assuming you normally sell an average of 40 loaves of cinnamon raisin bread each week:

a) How much gross profit do you usually make from your cinnamon raisin bread per week?

b) To make the same amount of profit you normally make, how much cinnamon raisin bread will you have to sell at the ad price?

2. Using the same example:

a) What margin do you normally make on your cinnamon raisin bread at the everyday price of $1.69, with a cost of $0.79 each?

b) What margin will you make on the cinnamon raisin bread at the ad price of $0.99 with a cost of $0.69?

3. Using the same example, assuming you tied in jumbo muffins at $2.49 for six (cost 1.00) with the cinnamon raisin bread:

a) How much total profit will you make if you sell 80 loaves of cinnamon raisin bread at the ad price?

b) How much total profit will you make if you sell 40 packages of jumbo muffins along with the 80 loaves of cinnamon raisin bread?

c) What is your gross margin from the sales of the loaves of cinnamon raisin bread and the 40 packages of jumbo muffins?

page 16



If your starting gross margin is not up to par, here are some things to check:

To see what aff ect increasing your gross margins has on overall profi tability, turn to the exercise on the next page.

Over-ordering on slow selling merchandise

Whether you buy direct or through a warehouse, one of the biggest contributors to a low gross margin in your department is having too much merchan-dise that doesn’t move fast enough.

Th e most successful departments order just enough merchandise to carry them from delivery to delivery, unless they are buying for a special promotion. Th ey know that turnover is the secret to profi tability.

Selling an unprofi table mix of items

Increasing overall profi ts in your department is accomplished through the right merchandising. Remember, on average, 85% of deli and of bakery shoppers will make an impulse purchase, if we give them a good enough reason to buy.

Customers tend to select from the items that are most visible in the department. If the department is merchandised correctly, the most visible items will also be profi table items. But without anything special to grab their attention, customers will more oft en make their selections based on price.

Having an insuffi cient range of products

Having too few styles and brands of popular prod-ucts can also aff ect your overall profi t margins. If you have not ordered some products in the past because they “don’t sell,”you may be able to build a customer base for those items using sampling, sug-gestive selling, special signs, and other merchandis-ing techniques.

Managers are oft en surprised when items that “don’t sell here” start selling quite well aft er an initial push.

Not aggressively merchandising ad items

To maintain profi t margins, ad items must be given special attention. To increase turnover, ad items need high visibility displays. To increase profi t-ability, they need to be tied in with related high profi t merchandise.

▶



Review of Course 3

Directions: Th is quarter, you have been concentrating on improving the overall profi tability of your department by changing your product mix and more aggressively merchandising your ad items.

Your results have been positive. Although your sales have risen slightly, your gross profi t is much higher, which means you are selling more profi table merchandise this quarter. Using the operating report, calculate your gross margin for this quarter.

CURRENT PERIOD

7/7/_ TO 9/30/_

13 WEEKS

PRIOR PERIOD

3/30/_ TO 6/30_

13 WEEKS

WEEKLY AVERAGE WEEKLY AVERAGE

AMT $ % AMT %

SALES 18,357 4.10 17,982 4.15

COST OF GOODS SOLD 9,225 50.25 10,024 55.74

TOTAL GROSS PROFIT 9,132 _____ 7,958 44.26

DIRECT CONTROLLABLE

WAGE 3,089 16.83 3,089 17.18

VACATION PAY 110 0.60 110 0.61

HOLIDAY PAY 130 0.75 138 0.77

OPERATING SUP 209 1.14 209 1.16

TOTAL 3,546 19.32 3,546 19.72

TOTAL DIRECT VARIABLE EXPENSES 59,291 30.57% 58,129 30.98%

DIRECT NON-CONTROLLABLE

FREIGHT IN 11 0.06 11 0.06

TOTAL 11 0.06 11 0.06

ALLOCABLE EXPENSES

PAYROLL TAXES 392 2.14 392 2.18

GROUP INSURANCE 0.00 0.00 6,529 3.48%

BAL OF OPERATING 1,269 6.91 1,269 7.06

TOTAL 1,661 9.05 1,661 9.24

TOTAL OP EXPENSE 5,218 28.43 5,218 29.02

OPERATING PROFIT 3,914 21.32 2,740 15.24

NET OPERATING PFT 3,914 21.32 2,740 15.24

page 17



Exercise 1: Generating Profit by Increasing Gross Margins

1. You have just made a price increase on an item — from $1.89 to $1.99. The cost has stayed the same — $1.09.

At $1.89, you were selling 50 units a week, making $40 in profit. At the new price of $1.99, how much do you need to sell to make the same amount of profit?

At the new price, mark-up is $1.99 − $1.09 = $0.90Units = $40 ÷ $0.90Units = 44.4You would have to sell 45 units to make $40 in profi t.

2. You are concerned that your department’s gross margin is lower than expected. To find out why, you’ve decided to analyze the mix of items you are selling.

Using the percents of sales and average profit margins listed below, determine:

• The contribution to margin of each product category

• The total gross margin for your department.

Category % of Total Dollar Sales Avg. Margin % for Category Contribution To Margin %

Breads/Rolls 27% 50% 13.5%

Breakfast Bakery 21% 48% 10.1%

Cakes 20% 65% 13.0%

Pies 10% 60% 6.0%

Cookies 8% 59% 4.7%


% of Total Dollar Sales × Avg. Margin % for Category = Contribution to MarginFor the Breads/Rolls category:27% × 50% = 13.5%

3. Based on your analysis in question 2, which product categories show the best potential for increasing the overall profit margin of the department?

Pies and cookies both have relatively high margins and low sales. Both items would be good candidates for promoting more aggressively.



Exercise 2: Ad Items

1. Next week’s ad features cinnamon raisin bread at a hot price: $0.99 per loaf instead of the everyday price of $1.69. Normally, this bread costs the bakery $0.79 per loaf, but thanks to a manufacturer’s allowance, the cost was reduced to $0.69 each. Now, assuming you normally sell an average of 40 loaves of cinnamon raisin bread each week:

a) How much gross profit do you usually make from your cinnamon raisin bread per week?

$1.69 (retail price) − $0.79 (cost) = $0.90 (mark up per loaf)

$0.90 (mark up) × 40 loaves = $36

b) To make the same amount of profit you normally make, how much cinnamon raisin bread will you have to sell at the ad price?

$36 (normal sales) ÷ 0.30 (mark up) = 120 loaves

2. Using the same example:

a) What margin do you normally make on your cinnamon raisin bread at the everyday price of $1.69, with a cost of $0.79 each?

$1.69 (retail price) − $0.79 (cost) = $0.90 (mark-up per loaf)

$90 (mark up) ÷ $1.69 (retail price) = 0.533 or 53.3%

b) What margin will you make on the cinnamon raisin bread at the ad price of $0.99 with a cost of $0.69?

$0.99 (ad price) − $0.69 (cost) = $0.30 (mark – up per loaf)

$0.30 (mark-up ÷ $0.99 (retail price) = 0.303 or 30.3%

3. Using the same example, assuming you tied in jumbo muffins at $2.49 for six (cost $1.00) with the cinnamon raisin bread:

a) How much total profit will you make if you sell 80 loaves of cinnamon raisin bread at the ad price?

$0.99 (ad price) − $0.69 (cost) = $0.30 (mark-up per loaf)

$0.30 (mark-up) × 80 loaves = $24

b) How much total profit will you make if you sell 40 packages of jumbo muffins along with the 80 loaves of cinnamon raisin bread?

$0.30 (mark-up) × 80 loaves = $24 (cinnamon raisin bread)

$1.49 (mark-up) × 40 loaves = $59.60 (jumbo muffins)

c) What is your gross margin from the sales of the loaves of cinnamon raisin bread and the 40 packages of jumbo muffins?

Gross profit from the cinnamon raisin bread and muffins is $24.00 + $59.60 = $83.60

Total sales is (80 × $0.99) + (40 × $2.49) or $79.20 + $99.60 = $178.80

Gross margin is $83.60 ÷ $178.80 = 0.468 or 46.8%



Review of Course 3

CURRENT PERIOD

7/7/_ TO 9/30/_

13 WEEKS

PRIOR PERIOD

3/30/_ TO 6/30_

13 WEEKS

WEEKLY AVERAGE WEEKLY AVERAGE

AMT $ % AMT %

SALES 18,357 4.10 17,982 4.15

COST OF GOODS SOLD 9,225 50.25 10,024 55.74

TOTAL GROSS PROFIT 9,132 49.75 7,958 44.26

DIRECT CONTROLLABLE

WAGE 3,089 16.83 3,089 17.18

VACATION PAY 110 0.60 110 0.61

HOLIDAY PAY 130 0.75 138 0.77

OPERATING SUP 209 1.14 209 1.16

TOTAL 3,546 19.32 3,546 19.72

TOTAL DIRECT VARIABLE EXPENSES 59,291 30.57% 58,129 30.98%

DIRECT NON-CONTROLLABLE

FREIGHT IN 11 0.06 11 0.06

TOTAL 11 0.06 11 0.06

ALLOCABLE EXPENSES

PAYROLL TAXES 392 2.14 392 2.18

GROUP INSURANCE 0.00 0.00 6,529 3.48%

BAL OF OPERATING 1,269 6.91 1,269 7.06

TOTAL 1,661 9.05 1,661 9.24

TOTAL OP EXPENSE 5,218 28.43 5,218 29.02

OPERATING PROFIT 3,914 21.32 2,740 15.24

NET OPERATING PFT 3,914 21.32 2,740 15.24

Gross profi t margin = Total gross profi t ÷ Total salesGross profi t margin = $9,132 ÷ $18,357Gross profi t margin = 0.4975 or 49.75%

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Skills Enrichment Activity A: Generating Profit by Adjusting Prices and Item Promotion

Overview: Each of these activities is a strategy to increase gross margins. You can determine what strategy works best by comparing the results from each activity.

1. Increase Prices

Directions: Monitor the sales of one item after doing a price increase. Compare weekly sales data prior to the increase and after the increase.

Item: _________________________________________________________________________________________________

Original Price: $ _________ Cost: $ _________ Weekly Sales Volume: ___________________

Profit: $ _________ Margin: _________ %

Comments: _____________________________________________________________________________________________

_____________________________________________________________________________________________________

_____________________________________________________________________________________________________

2. Decreasing Prices (Ad Items)

Directions: Monitor the sales of one ad item for a week. Compare weekly sales data at regular price and at ad price.

Item: _________________________________________________________________________________________________

Original Price: $ _________ Cost: $ _________ Weekly Sales Volume: ___________________

Profit: $ _________ Margin: _________ %

Ad Price: $ _________ Cost: $ _________ Weekly Sales Volume: ___________________

Profit: $ _________ Margin: _________ %

Profit Increase/

Decrease: $ _________

Margin Increase/

Decrease: _________ %

How can we measure the number of new customers attracted to the our department? ________________________________________________

_____________________________________________________________________________________________________

_____________________________________________________________________________________________________



3. Item Promotion

Directions: Order one item you think “doesn’t sell” in your department. Promote the product and its uses through the use of a special sign, sampling, and suggestive

selling. Monitor sales of the item to see what impact your efforts have on product movement.

Item: _________________ Price: $ _____________ Cost: $ ___________________

Normal Weekly

Sales Volume: _________________ Profit: $ _____________ Margin: ___________________ %

Promotion Weekly

Sales Volume: _________________ Profit: $ _____________ Margin: ___________________ %

Promotion Features: ________________________________________________________________________________________

_____________________________________________________________________________________________________

_____________________________________________________________________________________________________

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Skills Enrichment Activity B: Generating Profit by Promoting High-Margin, Slow-Moving Items

Directions: Using the same category you used in Course 1: Skills Enrichment Activity A, determine the contribution to margin on each item. Which items contribute most and which contribute the least? Take one slow-moving, high-margin item and try a special promotion with signs and suggestive selling. Monitor sales of that item to see how its contribu-tion changes.

Step 1: Calculate the item contribution to margin.

Category: ____________ (Use the same category as you used in Course 1, SEA A)

Items Weekly Sales

(per item)

Total Weekly Sales

(all items in category)

% Dollar Sales Margin Contribution to

Margin

Total $ 100%

Step 2: Take one slow-moving, high-margin item, and do a special promotion with signs and suggestive selling.

Step 3: Track the sales during the week of the promotion. What is the change in contribution to margin?



Skills Enrichment Activity C: Prioritizing Category Promotion to Increase Gross Profit

Directions: Calculate the contribution to margin of each category in your department like you did in Activity B. Determine which categories should be promoted more heavily to build gross profi t.

Calculate the item contribution to margin.

Category Weekly Sales

(per item)

Total Weekly

Department Sales

% Dollar Sales Margin Contribution to

Margin

Which category or categories should be promoted more heavily? ____________________________________________________________

____________________________________________________________________________________________________

____________________________________________________________________________________________________

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