CTD 231 Lecture 14: CTD 231 Chapter 14 Notes

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Clothing, Textiles and Interior Design
CTD 231

CTD 231 Chapter 14 Notes Pricing and Costing The Profit and Loss Statement • Accounting system chosen by firm provides the basic foundation needed for understanding of financial aspects of the business • Tracks information that results in a profit and loss statement (simplified chart that provides skeleton outline of accounting categories to show status of the business) • Format compares: ➢ Productivity of one season with another through examination of the dollar monetary values ➢ One business with another business through examination of percentages • Figures are used to evaluate the firm’s performance for past season; basis for preparing next season’s strategic financial plan Net Sales • Net sales  revenues taken in by a firm after all returns and other required adjustments have been subtracted from gross (total) revenue taken in during a specific time period • If percentage is used, net sales are always 100% • All other amounts on the profit and loss statement are referenced back to this net sales figure Cost of Goods Sold • Cost of Goods Sold  typically drives developer’s involvement with financial matters; includes: ➢ Variable costs ➢ Fixed cots ➢ Actual or estimated cost of finished goods and/or materials needed to produce product ➢ At the wholesale level, includes direct labor, production overhead, and indirect labor • Critical that costs be known and budgeted before manufacturing birds are evaluated and selected for contracts • Average cost of goods sold is between 40-60% of total sales; typical goal is to keep as low as possible, preferably less than 50% of wholesale price Gross Margin • Gross margin  left after cost of goods sold is subtracted from net sales • If 40-60% of the firm’s net sales have been spent on the cost of producing the garments, this leaves a gross margin of 40-60% (out of 100%) • Operating expenses for producers include sales and marketing, costs of discounts and chargebacks, corporate overhead • Indicates how well a business is doing in maintaining its “margins” for the time period ➢ Around 50% reflects positive business climate; lower than 40% is a concern ➢ Contractor with low costs may be able to survive on a gross margin as low as 25%; one with fancy corporate headquarters may need a much higher gross margin Profit • Profit  bottom line of any business statement; must be positive • If final figure is negative, the business is losing money and must make a turnaround to profit or go out of business • Average profit of apparel business is closer to 4-8% of net sales Pricing Strategies • Price: monetary value or revenue collected from customer • Customer of a manufacturer may be a retailer, customer of a retailer is the consumer • Cost: monetary value expended to produce or acquire a garment style • Price must exceed cost by enough for the firm to make a profit • Companies must consider strategies used to establish prices ➢ Basing price solely on cost of goods and adding set markup (doubling the costs of goods to achieve a price)  unrealistic market view ➢ Demand-based pricing  considers value customers place on manufacturer’s or retailer’s reputation and its products • Demand-based pricing methods: ➢ Status/prestige pricing  set well over merchandise costs on theory that customers value styling and prestige of brand/designer lines, image advertising ➢ Market penetration pricing  set as close as feasible to maximize volume of sales by taking sales away from established firms; used to gain market share o Companies may have to employ brand names, advertising, and related cost strategies to compete for market share Retail Pricing • Price of product  revenue collected from customer in exchange for ownership of product • Cost  amount paid to acquire product • Markup: amount added to cost of goods to arrive at final price; manufacturers add markup to wholesale price to arrive at consumer’s ticketed price Wholesale and Private Label Pricing • Cost is a major concern • Other three components: ➢ The markup needed to sustain profitability ➢ Through knowledge of the consumer ➢ Knowledge of prices and practices of competition • Target Market Pricing: (version of market pricing) priced at what merchandisers perceive the market will bear Discounts and Allowances • List price: manufacturer’s suggested retail price or amount deter
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