IDIS 240 EXAM 2 - EVAN VESTAL - SPRING 2022

List Price

Nationally Advertised Price

Selling Price

List Price - Trade Discounts

= COGS + Margin

or

= COGS + Markup

Net Price

Selling price - all allowable discounts (cash discounts), equal to selling price IF NO DISCOUNTS

Cost of Goods Sold (COGS)

Cost of Merchandise + Freight charges from Manufacturer

Freight Cost

The cost of moving an item from where it was manufactured to either the distributor or the customer's location

Free On Board (FOB)

- Commonly used on the invoice to show who is to pay the transportation charges

- Who is to control the movement of the shipment

- Where the title passes to the buyer

Free On Board (FOB) Destination

Manufacturer pays to have it delivered, own the product while it's being transported

Free On Board (FOB) Shipping Point ***

Once the manufacturer puts it on the trust, distributor pays for it and they own it

Trade Discounts

- Means of adjusting the price for variations in the cost of raw materials

- Competitive pricing in the marketplace

- For services provided by the distributor (stocking the item)

Trade Pricing ***

- A pricing methodology that involves negotiating the actual price that will be paid as opposed to "list price - a discount" method

- Referred to as matrix pricing, a markup from a confidential negotiated distributor cost

Two drivers to growth of this type

- Increased complexity

- System capabilities

Cash Discounts ***

- Offered to encourage early payment of invoices and when taken they will enhance the sellers cash flow

- Amount that can be subtracted by the total amount of the invoice by the distributor before paying the bill

- Offered as encouragement to a distributor to pay their invoice within a specific amount of time

- CASH DISCOUNTS ARE NOT GIVEN, they are offered then taken or refused by the distributor

- Cash discounts are important to profitability

Special Orders

Usually consist of standard products with slight modifications to design, finish, materials and packaging

Minimum Order

Minimum amount you need to order to purchase

Freight Allowed

Amount that must be purchased to have the manufacturer pay the cost of the freight for a standard shipment

Claims

Making a claim that it is broken, damaged, lost. Billing or shipping errors, shortages

Returns

You don't get all of your money back, 10-20% restocking fee

Margin Dollars

- Margin dollars are used to pay employee cost in wages, benefits, and all other costs of doing business

- Margin dollars should generate a reasonable amount of profit after paying everything

Margin Gross Margin

difference between what the distributor pays for an item and what the distributor gets for the sale

Percent Gross Margin

((selling price - COGS) / selling price) * 100%

Smaller Percentage, better measure of how the company is doing

Markup

- How much money the distributor adds to the cost of goods sold

- Margin dollars = markup dollars, no difference in dollars but different in percentages

- Companies prefer Margin

Percent Markup

((Selling price - COGS) / COGS) * 100%

Larger percentage, we usually don't really care about percent markup

Operating Expenses (OE)

All costs necessary to provide services for the distributor's customer:

- Warehouse cost

- Inventory holding cost

- Transportation cost

- Bad Debt Expense: Money you expect to not get back, "This man owes me $200 from 30 years ago"

Selling, General, and Administrative Expenses (SG&A)

- Salaries, commissions, and other payroll costs that we pay our executives and sales persons

- Outside Sales: Travel costs, Entertainment costs, Advertising Costs

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

Margin - OE - SG&A

Depreciation and Amortization (DA)

- Expensive that captures the reduction in value of assets over time

- Using it as an expense to decrease your income, to lower your taxes

Earnings Before Interest, and Taxes (EBIT)

Represents the profit before interest and taxes are subtracted

Interest Expense

Cost paid to borrow money

Net Profit Before Tax (NPBT) ***

EBIT - Interest Expense

Net Profit After Tax (NPAT) ***

- Represents the money that can be spent, distributed to shareholders (dividends), reinvest in the company to fund its growth

- Do whatever we want with it, hopefully legal stuff

Accounts Payable

Money distributors own the manufacturer for products bought

Accounts Receivable

Money that the customer owes the manufacturer

Days Sales Outstanding

- (Receivable Dollars * 365 ) / Sales

- 30 days in the usual, gets scary around 45

- Interest + late fees for credit card

- No fee for normal distributors, we just pray they pay it back

Inventory / Stock

Items purchased, brought into our warehouse, and held on hand for resale

Average Warehouse Inventory

Average amount of inventory in the warehouse

Inventory Turn

Item turn is complete when:

Item Purchase → Put into Inventory → Sold → Money is collected → Another product purchased

= (COGS from Inventory / Average Warehouse Inventory)

Gross Margin Return on Inventory Investment (GMROII)

- (Gross Margin Dollars Earned on Warehouse Sales / Average Warehouse Inventory)

- Better measure of how distributor used their inventory to gain margin dollars

Wayne Gary

Master Pumps

Ryerson

Travis Hibbets

Trade Discounts - Example

$2,000 worth of wire (20 rolls * $100 per roll) is being purchased with trade discounts of "twenty-five, ten, and five"

Lead discount / The first discount is 25%

Subsequent discounts / The supplementary discounts are 10% and 5%

Step 1:

List price of the wire = $100 (per roll)

Invoice = $100 x 20 = $2,000

The first discount of 25% is $2,000 x 0.25 = $500

Step 2:

Deduct the amount of the discount from the list price:

$2,000 - $500 = $1,500

Step 3:

Find the second discount (10%) from the earlier discounted price: $1,500 x 0.10 = $150

Step 4.

Subtract this from the previously discounted price: $1,500 -

$150 = $1,350

Step 5:

Find the quantity discount: $1,350 x 0.05 = $67.50

Step 6:

Subtract discount from the previous price to find the invoice price: $1,350 - $67.50 = $1,282.50

Invoice for 20 rolls = $1,282.50 plus any freight

Simplified Method:

$2,000 x 0.75 x 0.90 x 0.95 = $1,282.50

Multiplying Factors:

0.75 x 0.90 x 0.95 = 0.64125

$2,000 x 0.64125 = $1,282.50

Commodity

- Products that have very little measurable difference between suppliers

- Pure commodities typically refer to raw materials such as copper, gold, chemicals, etc.

Commoditization***

- Difference between products has narrowed over time. Common among products that have pure commodities as a large portion of the finished product

- Examples include dimensional lumber, PVC pipe, aluminum and copper wire, etc.

Deviations from Standard COGS

OEM Example:

Suppose the end user wants the product from the local warehouse of the distributor (to reduce the lead time), then the distributor is forced to maintain a local inventory. He gets the goods at $6 from the manufacturer, maintains the local inventory, ships the product to the end user, informs the manufacturer about the shipment and gets a $2 refund from the manufacturer. This is called "ship from stock and debit" or simply "ship and debit".

TLDR: Sell it for less, debit us for the rest of the money, it's a rebate

Shorter examples include:

- Construction Projects

- Meet competition

- Meet budget

- Reduction in value (such as electronics, because nobody wants the iphone 3)

- Value Engineering: When everyone supplying products and labor to the project will try to reduce the total cost

Percent Markup & Percent Gross Margin - Example

An items has a COGS of $100 and a sale price of $125

What is the percent markup?

PercentMarkup = ((SellingPrice - COGS) / COGS) x 100%

= 25%

PercentMarkup = ((125 - 100) / 100) x 100%

= 25%

What is the percent gross margin?

PercentGrossMargin = ((SellingPrice - COGS) / SellingPrice) x 100%

PercentGrossMargin = ((125 - 100) / 125) x 100%

= 20%

Selling Price with Known Percent Markup or Percent Gross Margin - Example

A distributor purchased a special machinery repair part for a customer. The part was received along with an invoice of $701.00 which included freight. The distributor wants to make 28% gross margin on the sale of special orders

What is the sale price?

What would be the sale price to achieve 28% markup?

SellingPrice = COGS / (100% - PercentGrossMargin)

701 / (100-28) = 701 / 0.72 = $973.61

Selling Price = COGS * (100% + PercentMarkup)

701 x (100+28) = 1.28 x 701 = $897.28

Converting from Percent Markup to Percent Gross Margin - Example 1

A distributor is invoiced $25 for a raised face weld-neck flange. The gross margin is to be 18%. What is the selling price?

Selling Price = 25 / (100-18) = 25/0.82 = $30.49

Converting from Percent Markup to Percent Gross Margin - Example 2

A lathe tool holder costs a distributor $183. The distributor plans to make 40% gross margin. What would be the selling price?

Selling Price = 183 / (100-40) = 183/0.6 = $305

Converting from Percent Markup to Percent Gross Margin - Example 3

A distributor purchased a set of tools for $270 and marks the item up 35%. What is the gross

margin percentage? What is the gross margin dollars?

Percent Gross Margin = (35/135) x 100 = 25.92%

Selling Price = 270 / (100% - 25.92%) = 270/0.7408 = $364.47

Gross Margin dollars = $364.47 - $270 = $94.47

Converting from Percent Markup to Percent Gross Margin - Example 4

If a distributor purchases an item for $100 with trade discounts of "two fives" what is the cost?

At 20% margin, what is the sale price and gross margin? If the manufacturer provides the distributor an additional "five," what is the new sale price and gross margin if we extend the customer the "five" off the sale price? What is the effect on margin dollars?

Using Multipliers for 5% & 5% discounts,

COGS = 100x0.95x0.95 = $90.25

Given: 20% Gross Margin

Selling Price = 90.25 /(100% - 20%) = 90.25 /0.8 = $112.8125

Margin dollars = $112.8125- $90.25 = $22.5625

If the manufacturer provides the distributor an additional "five,"

COGS = 100x0.95x0.95x0.95 = $85.7375

Selling Price = 112.8125x0.95 = $107.1718

Gross Margin in dollars = $21.4343

Gross Margin = (21.4343/107.1718)*100% = 19.999%

Be careful not to pass on all of the discounts and reductions, it reduces the gross margin in dollars.

Passing on Discounts and Reductions Example

If a distributor purchases an item for #100 with trade discounts of "two fives" what is the cost? At 20% margin, what is the sale price and gross margin? If the manufacturer provides the distributor an additional "five", what is the new sale price and gross margin if we extend the customer the "five" off of the sale price? What is the effect on margin?

COGS = 100 x 0.95 x 0.95 - $90.25

Given 20% Gross Margin

Selling Price = 90.25 / (100 - 20) = 90.25 / 0.8 = $112.8125

Margin Dollars = $112.8125 - 90.25 = $22.5625

If the manufacturer provides the distributor an additional "five"

COGS = 100 x 0.95 x 0.95 x 0.95 = $85.7375

Selling Price = 112.8125 * 0.95 = $107.1718

Gross Margin in dollars = $21.4343

Gross Margin = (21.4343/107.1718) * 100% = 19.999%

The word of god

Always take discounts never give them, buy cheap sell high

Sasha Nicoles

Reece

Unit of Measure - UOM

The unit in which the quantity of an item is managed, e.g., pounds, each, box of 12, package of 20, or case of 144. Various UOMs may exist for a single item. For example, a product may be purchased in cases, stocked in boxes, and issued in single units.

2% / 10 days net 30

A 2% discount is allowed if paid on or before ten days after the invoice date. Otherwise the entire invoice is due on or before 30 days after the invoice date

2% / 10th prox net 30th

A 2% discount is allowed if paid on or before the tenth day of the month after the invoice date. Otherwise the entire invoice is due on or before the 30th day of the month after the invoice date

2% / 10th prox net 25th

A 2% discount is allowed if paid on or before the tenth day of the month after the invoice date. Otherwise the entire invoice is due on or before the 25th day of the month after the invoice date.

4% / 10 net 11

A 4% discount is allowed if paid on or before ten days after the invoice date. Otherwise the entire invoice is due on or before 11 days after the invoice date

Value of Discounts

(Discount %/ (100% - Discount %)) * (365 days / (total days - discount days))

Discounts

Manufacturers give discounts to distributors to increase cash flows or reduce the amount of cash the manufacturer needs to run the business

Value of Discounts - Example

On April 26th, Ding Golf Corporation received an invoice amounting to $1,200.00 for materials purchased from Alcoa. The terms of the invoice were 2/10, 1/30, n/60. (2% on the 10th, 1% on the 30th, and net amount on the 60th). How much was due on May 6th? May 26th?

10 days: 1,200 - (0.02 * 1200)

30 days: 1200 - (0.01 * 1200)

The dangers of passing through the cash discount

Extended dating:

- 2%/90 net 120

- Good credit

- Slow moving inventory

- New items

- Seasonal items sold out of season

You've decided to start a business!

What do you need?

- People

- Location

- Equipment

- Working Capital (Inventory, Receivables, Cash)

You've decided to start a business!

Where are you going to get your stuff?

Bank

Private investor

Suppliers

Debt vs Equity Financing

Taking out a loan and going into debt vs having someone pay you for a share of your business

What is the lifeblood of any company? ***

Cash

What do the investors expect of you?

That you grow your company and make them more money

Interest

fee charged for the use of money over a period of time

Simple Interest

I = P R T

Compound Interest

Interest on top of interest

A = P(1 + (r / n)) ^ (n * t)

Revolving Loan or Line of Credit

Line of how much we owe, not paying interest on it until we need it

Return on Total Assets (ROTA) ***

(Revenue - Expense) / Assets

Number which branch managers which branch managers should be held responsible and which they should be rewarded

Return on Investment (ROI)

The number of which the professional corporate manager should be rewarded

Liquidity Risk

not being able to liquid it

Maturity Risk

not being able to predict future changes in interest rates or inflation

Default Risk

not being able to pay it back

What is the purpose of a business according to the book?

The purpose of a business is to create and maintain a customer

Profit is ______ a test of management decision making

only

Profit is ____________ to maintain the customer.

required

Two primary function of a business

Innovation & Marketing everything else is just cost

Six Ways to Make Money in Distribution

- Buy Lower

- Sell Higher

- Collect Sooner (ask the people to pay us sooner, offer discounts)

- Pay Later

- Turn Inventory More Often

- Increasing Operating Efficiencies (turning the lights off when you leave)

Distribution Performance Analysis Consistently

Shows That the Highest Profit Companies:

- Buy only 1.5% - 2% Better Than the Lowest Profitability Companies

- Sell Less than 2% Higher

- Collect 3 - 5 days Sooner

- Negotiate Terms and Payment Options

- Turn Their Inventory More Often

- Decrease Operating Costs Continually

The Power of Small Numbers

Four Scenarios

- Impact of growing sales: 5% growth

- Impact of buying better: 2% less in cost of goods sold

- Impact of reducing expenses: 5% less in each expense category

- Impact of raising prices: 2% increase in overall prices

Pricing / Profit Impact Cutting Profits

To make the same profit:

If you Cut Prices 2% - You must increase Sales by 8.7%

5% - You must increase Sales by 25%

10% - You must increase Sales by 66.7%

20% - You must increase Sales 400%

Pricing / Profit Impact Raising Prices

To make the same profit If you Raise Prices;

2% - You only need 92.6 % of the volume

5% - You only need 83.3% of the volume

10% - You only need 71.4% of the volume

20% - You only need 55.5% of the volume

Competitive Positioning ***

The cosmic law of business says you can profitably excel by doing any two of these three:

- Good

- Cheap

- Fast

Which changes EBITDA the most?

Company Growth by 5%

Reduce COGS by 2

Reduce expenses by 5%

Raise prices by 2%

Raising prices, easiest to do in a computer, hardest to do in person

Company Growth by 5%, EBITDA went up 6.69%

Reduce COGS by 2, EBITDA went up 15.50%

Reduce expenses by 5%, EBITDA went up 10.66%

Raise prices by 2%, EBITDA went up 20.95%

Economics of Distributor Profit Optimization

Product → Presence → Processes → Performance

- Opportunity is the result of complex interactions between several dynamics

- Accordingly, Profit improvement is an Accordingly, Profit improvement is an integrated integrated process

- A Systems approach seeks to balance these interactions and drive improvement

The Power of Small Numbers

Impact of Growth

5% increase in all catagories

The Power of Small Numbers

Impact of buying better

2% less in COGS

The Power of Small Numbers

Impact of reducing expenses

5% less in expenses

The Power of Small Numbers

Impact of raising prices (not you, the manufacturer)

2% increase in price

The Power of Small Numbers

Impact of growth - 5% increase in all catagories

Impact of buying better - 2% less in COGS

Impact of reducing expenses - 5% less in expenses

Impact of raising prices - 2% increase in price

Overall total increase of 54%