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6. Crafts and Things had sales of $102,000 during June. Its end of the month (EOM) stock was
$300,000 and its beginning of the month (BOM) was $270,000. What were its additions to stock
during June?
9. Gifts, Etc., a small gift-and-craft store, has the following plan for April:
Sales $70,000
BOM stock $200,000
EOM stock $195,000
Planned reductions $2,500
Planned gross margin 40%
What are the planned purchases for the store at retail and at cost?
11. Forecast the sales for the next sales period for a retailer using exponential smoothing
and the following information:
Old forecast = 100 units
Actual demand = 67 units
Alpha = .08
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Teaching Notes
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Case A21: Merchandise Planning Problems
Synopsis: Set of merchandise budget planning math problems.
Use: Chapters 12, 13 Provides an opportunity for students to go through the calculations needed to
develop a merchandise budget plan and assess the financial performance of a
merchandise category.
Discussion Questions
1. Clothes for Men casuals has $20 million net sales. Average inventory at retail is $17 million.
What is Clothes for Men’s inventory turnover?
2. What is the inventory turnover of a small pet shop chain with annual sales $20 million, average
inventory at cost of $6 million and a gross margin of 40 percent?
3. What is the GMROI for each of the merchandise categories in a bookstore?
Category
Textbooks
General
Reading
Reference
Books
Newspapers,
Magazines
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Which of these categories is most profitable for the bookstore? Should the bookstore eliminate the
least profitable category?
4. What is the annual inventory turnover for a retailer with the following monthly sales and
inventory levels? Assume the maintained markup over the first six months was 40%.
Month
Sales
BOM Inventory at
Cost
January
$14,000
$40,000
March
39,000
May
40,000
June
38,500
5. What are the retail and cost value of Sound Music at the end of the month of October based on
the following accounting information?
a. BOM inventory worth $200,000 at cost and $300,000 at retail.
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6. Crafts and Things had sales of $102,000 during June. Its end of the month (EOM) stock was
$300,000 and its beginning of the month (BOM) was $180,000. What were its additions to stock
during June?
7. The annual sales of Harry’s Stereo chain was $56,000,000. The average inventory at cost was
$40,000,000 and the gross margin was 43 percent. What were the chain’s GMROI, inventory
turnover, and average stock-to-sales ratio?
GMROI = ($56,000,000 ÷ 40,000,0000) X 43 = 60.2 percent
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8. A tennis shop has developed the following merchandise plan:
Planned EOM stock
$45,000
Projected BOM stock
35,000
Actual on order (what is on order for the
month)
25,000
Plan monthly sales
10,000
Plan reductions for the month.
2,000
What is open-to-buy for the month?
Projected EOM stock
$48,000
Projected BOM stock
9. Gifts, Etc., a small gift and craft store, has the following plan for April:
Sales
$35,000
BOM Stock
100,000
EOM Stock
97,500
Planned Reductions
1,250
Planned Gross Margin
40%
What are the planned purchases for the store at retail and at cost?
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10. Based on the following information from the merchandise budget plan for a women’s accessory
department in a specialty store, what is the open-to-buy as of April 1?
Planned Monthly Sales
$124,000
BOM Inventory
150,000
EOM Inventory
April Merchandise Already Received
April Merchandise on Order
Planned Reductions
Projected EOM stock
Actual BOM stock
+ Actual monthly additions to stock (what was actually received)
+ Actual on order (what is on order for the month)
11. Forecast the sales for the next sales period for a retailer using exponential smoothing Retailer X
wants to forecast sales for the next sales period using the following information:
Old Forecast
= 100 units
Alpha
= .08
12. What is the order point, and how many units should be ordered if a food retailer has an item
with a 10-day lead time, 3-day review time, and a daily demand of 15 units? 75 units are on
hand and the retailer must take a safety-stock of 50 units to maintain a 95% service level.
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Case A22: Urban Outfitters and the Coffee Crowd
Urban Outfitters (hereafter UO), the specialty store that poses as an ultra-cool department store for
upscale 18-to–30-year-olds, has maintained a healthy balance sheet by carefully selecting its merchandise
and store locations. The average merchandise buyer in this Philadelphia-based chain is in his or her mid-
twenties, which keeps the selection current with its target market. The selection of men’s and women’s
clothing, accessories, bath items, greeting cards, housewares, and tabletop decorations is quick to move
with the times, having evolved through stages of preppy to punk to nostalgic to mod to 70s styles. There
is always a note of irreverence in the merchandise and store design, which helps to maintain UO’s cool
image.
The manager called a few local gourmet coffee roasters/distributors to learn about the costs of various
coffee bar options. The classy espresso machines that she so admired would probably not work. At more
than $5,000 for a quality commercial machine and its related equipment, she doubted that the store could
sell enough to cover the costs in the near future. In addition, operating an espresso machine takes much
more skill than a traditional drip brewer. On the other hand, a commercial-grade coffee brewer could be
purchased for $800, and an acceptable 2.2 liter (74-ounce) industrial-grade carafe could be purchased for
$40. If the coffee bar was a success, she could consider upgrading these carafes to more attractive and
durable $75 models. Given the local competition, and her desire to simplify the money-handling process,
Ancillary Cases and Teaching Notes
One problem would be where to put the coffee bar. As with other stores in the chain, it was important to
have adequate stock on the floor, but to maintain an uncluttered atmosphere to showcase the unique
merchandise. (The lava lamps shouldn’t be overlooked!) To set the ambiance and the potential for sales,
the manager wanted customers to see the coffee station as soon as they entered the store. This meant that
it could either be at the central checkout counter or occupy a 25-square foot area on a wall in the front of
the store. Locating the station close to a register would allow sales associates to monitor self-service
coffee purchases. However, this would mean substituting it for a jewelry case, which generates $600 per
square foot at a gross margin of 72 percent.
Discussion Questions
1. Evaluate in financial terms the manager’s plan to install a coffee bar in Urban Outfitters.
2. Evaluate the coffee station in terms of Urban Outfitters’ retail strategy.
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Teaching Notes
Case A22: Urban Outfitters and the Coffee Crowd
Synopsis: Urban Outfitters is an apparel specialty store catering to Generation X customers. A store
manager is considering installing a coffee bar in his store.
Use: Chapter 12 Illustrates the decision to combine services with merchandise offering.
Chapter 15 Opportunity for students to perform a more complex break-even analysis.
Discussion Questions
1. Evaluate the manager’s plan to install a coffee bar in Urban Outfitters in financial terms.
On the surface, the gross margin (54%) compares favorably to most merchandise categories.
Break-even analysis:
2 carafes
4 carafes
Brewer
$800
$800
Carafe @ $40
$ 80
$160
FC/contribution margin per carafe:
233 pots
254 pots
Annual sales =
Sales/day * 360 days the store is open:
$5,040
$10,080
Annual gross margins/sq. ft. =
While the margin of coffee is attractive, the store would have to sell more than 4 carafes per day (with
no wastage) to match the sales per square foot of merchandise in the front-of-store location. While the
manager seems certain about selling two carafes, five might be a leap of faith. The manager must ask
herself: would 35 customers want to buy a cup of coffee each day? As stated in the case, the
estimated sales and margins for the coffee compared with the jewelry counter location are not
favorable.
Ancillary Cases and Teaching Notes
2. Evaluate the coffee station in terms of Urban Outfitter’s retail strategy.
Even if the financial estimates were favorable, the manager must assess if the coffee station
complements UO’s retailing strategy. First, UO would have difficulty attracting demanding coffee
customers from the “cool” gourmet coffee shops in the areas where it locates. Generally, these cafes
provide the coffee expertise and the economies of scale that provide greater variety and service level
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Case A23: Stan’s Shirts
Stan Soper has a 600-square-foot T-shirt store in a good mall location. He has all colors and sizes plus
hundreds of designs for heat-embossing onto the shirts. Every shirt sells for $10. In his area, Stan
estimates he has about a steady 12 percent share of a 100,000-units-per-year customized T-shirt market.
Stan has found this to be a nonseasonal business. Sales hardly vary from one month to the next.
Stan’s costs are
Discussion Questions
1. What is the unit contribution for the T-shirts?
2. What is Stan’s monthly break-even point?
3. What market share does he need to break even?
4. What is his monthly profit?
Source: This case was prepared by William R. Swinyard, Brigham Young University.
Ancillary Cases and Teaching Notes
Teaching Notes
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Case A23: Stan’s Shirts
Synopsis: Owner of a small hypothetical T-shirt store is trying to determine the break-even point for
various scenarios.
Use: Chapter 15 Illustrates the impact of price points on break-even sale.
Provides an opportunity for students to do a simple break-even problem.
Discussion Questions:
1. What is the unit contribution for the T-shirts?
Costs
Per Unit
Variable:
T-shirt
2. What is Stan’s monthly break-even point?
3. What market share does he need to break even?
4. What is his monthly profit?
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5. Because of some new fashion announcements he has just received. Stan expects T-shirt sales in
his area to increase to about $144,000 next year. He’s considering raising his advertising budget
by $800 per month.
a. If the advertising budget is raised, how many T-shirts must he sell to break even?
b. How many T-shirts must he sell per month to get the same profit as this year?
c. What must his market share be next year to get the same profit as this year?
d. What must his market share be for him to have a monthly profit of $3,000?
Ancillary Cases and Teaching Notes
Case A24: Pricing Problems
Some of these problems can be solved using the Pricing section of the student side of the Online Learning
Center.
Questions
1. The cost of a new CD album is $8.75. The buyer plans to make an initial markup of 25 percent on
the retail price. What should the retail price be?
2. The initial selling price for a blouse is $25. The cost was $14. What was the initial markup on retail?
3. A belt was originally priced at $17 and put on sale for $12. What was the markdown percentage
on retail?
6. A buyer for men’s ties wants to have a maintained markup of 40 percent. The buyer forecasts that
the reduction as a percentage of sales will be 13 percent.
a. What should the initial markup be?
b. If the cost of each tie is $12, what would be the initial selling price?
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8. A buyer for women’s hosiery is planning to buy merchandise to be sold during the summer
season that will generate retail sales of $150,000. The buyer wants to have a maintained markup
of 34 percent on retail for summer hosiery sales. Reductions will be very small and can be
ignored. The buyer has already spent $53,250 for merchandise that will generate $75,450 at retail.
What markup does the buyer need to have on the remainder of the planned purchases to realize
the overall markup of 34 percent?
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Teaching Notes
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Case A24: Pricing Problems
Synopsis: Set of pricing and markdown problems.
Some of these problems can be solved using the tools on the student side of the Online
Learning Center.
Use: Chapter 15 Provides an opportunity for students to go through the calculation needed to set
prices and markdown merchandise
Answers to Problems:
1. The cost of a new CD album is $8.75. The buyer plans to make an initial markup up of 25% on
the retail price. What should the retail price be?
2. The initial selling price for a blouse is $25. The cost was $14. What was the initial markup on
retail?
3. A belt was originally priced a $17 and put on sale for $12. What was the markdown percentage
on retail?
4. The cost of bicycle is $200. The initial markup on retail is 40%. After offering the bicycle at the
initial selling price, the bicycle was markdown by 20% and it sold at that price?
a. What was the final selling price for the bicycle?
b. What was the maintained markup?
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5. A woman’s dress suit was originally priced at $250. The first markdown was 20% on retail and
the second markdown was an addition 30%. What is the selling price of the suit after the second
markdown?
6. A buyer for men’s ties wants to have a maintained markup of 40%. The buyer forecasts that the
reduction as a percent of sales will be 13%.
a. What should the initial markup be?
b. In the above example, if the cost of the ties is $12, what would be the initial selling price?
7. A buyer orders 500 cotton sweaters at a cost of $20 per sweater.
The steps in the problem illustrate the logic for solving problems of this type
a. What is the cost for all of sweater when they are sold?
b. If the buyers wants to have a maintain markup of 50%, what is the total sales dollars that
must be generated by the sale of all 500 sweaters?
maintain markup = $40 * 500 = $20,000
c. The buyer sets the initial selling price for the sweaters at $45. 200 sweaters are sold at
that price. How many sales dollars were generated by the sales of the initial 200 sweaters?
d. How many sales dollars must be generated by the remaining 300 sales to achieve a
maintained markup of 50%?
$20,000 − $9,000 = $11,000
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f. How much of a markdown on retail can the buyer take to realize a 50% maintained
markup on the sales of all 500 sweaters?
8. A buyer for women hosiery is planning to buy merchandise to be sold during the summer
season that will generate retail sales of $150,000. The buyer wants to have a maintained markup
of 34% on retail for summer hosiery sales. Reductions will be very small and can be ignored.
The buyer has already spent $53,250 for merchandise that will generate $75,450 at retail. What
markup does the buyer need to have on the remainder of the planned purchases to realize the
overall markup of 34%?
The buyer’s goal is to generate $150,000 in sales and realize a total gross margin of $150,000 * .34 =
$51,000.
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9. A buyer has purchased 100 handbags at $18 each. Some of the handbags will be sold at $28
retail and others will be sold at $36 retail. How many handbags should be put at each price
point to realize a maintained markup of 40% assuming no reductions?
To generate a maintained markup of 40%, the buyer needs to have an average retail of $30.
10. A retailer is considering the development of a collection of private label men’s ties. The ties
which will retail for $65.00 each will incur an expense to the retailer which include $15,000 in
fixed costs and $19.50 in variable costs. What is the Break-even point for the retailer expressed
in both units, and dollars.
Ancillary Cases and Teaching Notes
Case A25: Dexter Brown, Star Salesperson
Janet Gould (personnel administrator of Ian’s, an elegant men’s boutique in New York) had to decide
what to do about her current problem child, salesman Dexter Brown.
Brown, a young man of 26 with movie-star good looks and a personality to go with them, had come to the
store with wonderful references. He’d sold for two other men’s stores (both somewhat less pricey than
Ian’s) and both his supervisors had said he was the best salesman they’d ever had. Indeed, he lived up to
his advance billing. Ian’s average salesman sold $1,000 a day on weekdays and $1,500 on Saturdays. In
Brown’s second week, he hit $2,000. Every day he was beating all the more experienced people hands
down.
Overall, store sales were up since his joining the staff, but nowhere near 50 percent, which meant that he
was in effect “stealing” some of the other men’s business.
Gould had heard complaints from some of the others. Jim Green said, “I’ve got to admire that guy. I
watch him all the time and learn something new each time. But he’s eating into my commissions, and I
don’t like that. I’ve got a family to feed.”
Art Ward was less complimentary. “That little rat, he’s stealing my customers—my customers. He
doesn’t give them a chance to come in and say hello—he just grabs them. They’ve started listening to
him.”
Discussion Questions
1. What are the positive and negative aspects of Brown’s behaviors?
2. Should the boutique fire Brown?
3. How can Gould emphasize the positive aspects of Brown’s behavior and reduce the negative
aspects?
4. What specifically would you say to Brown during the six-month review meeting?