Gross Margin and Mark-Up Understanding Distributor Impact on Your Profit (20 Poi

Question

Gross Margin and Mark-Up
Understanding Distributor Impact on Your Profit
(20 Points)

Due to the nature of your business, you have chosen to use distributors (firms who purchase large quantities from you and redistribute to customers, using their own sales force, warehouse, and trucking capabilities). The distributor actually purchases, owns, stores, and delivers your product for you to a retailer, earning a profit on that activity. The retailer then resells the product, earning a profit on that activity. The distribution chain that you participate in has the following profile:
Manufacturer Cost Of Goods=0.25
Distributor Purchase Price=0.45
Retailer Purchase Price=0.60
Customer Purchase Price=1.00



If your cost of goods is $0.25, what is your gross margin, the distributor’s gross margin, and the retailer’s mark-up percentage? What would your gross margin rise to if you sold direct to the retailer, eliminating the profit of the distributor?

1. Identify unknowns



2. Show relationships





3. Connect with formulas





4. Solve the problem

Explanation / Answer

1. Unknown’s identification:

Here for every question all the required information is given, all we have to do is to calculate the gross margin using the formula.

2. Relationships:

Here the purchase price of the distributor is the selling price of the manufacturer, in the same way the purchase price of the retailer is the selling price of the distributor.

3. Formulas:

Gross margin = Sales – Cost of goods sold

Mark-up percentage = Mark-up / Purchase price

4. Solving the problem:

Distribution profile:

Manufacturer Cost Of Goods =0.25
Distributor Purchase Price      =0.45
Retailer Purchase Price           =0.60
Customer Purchase Price        =1.00

Manufacturer's gross margin:

If the cost of goods manufacturing is $0.25 then the gross margin of the manufacturer is as follows;

As the manufacture is in the distribution channel he has to sell the goods at $0.45 to the distributor;

So the gross margin is;

Selling price                = 0.45

Cost of manufacturing = 0.25

Gross margin            = $0.20

Distributor gross margin:

Distributor selling price   = 0.60

Purchase price               = 0.45

Gross margin               = $0.15

Retailer mark-up percentage:

Retailer selling price     = $1.00

Purchase price             = 0.60

Mark-up                     = $0.40

Mark-up percentage (0.40 / 0.60) = 66%

Increase in profit:

The profit of the manufacturer will increase when there is no distributor since he directly sells to the retailer at the present price. So the increase in the manufacturer's profit can be calculated as follows;

Selling price                = $0.60

Cost of manufacturing = 0.25

Gross margin              = 0.35

Increase in profit (0.35 - 0.20) = $0.15

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.