I was looking at some store training today and one question was something like "How many of the same item must be sold to make up the profit lost because of one stolen item?" The correct answer was 35.
With gross profit margins of around 30%, I'm trying to figure out how it can take 35 sales to make up the difference. The store manager seemed to have a little trouble believing that figure, too.
They would be looking at net profit.
Ken Russell
lets see, one divided by 34 is roughly equal to 3%.
the writers expected a 3% bottom line and you have to generate that much profit to replace an item whose profit you did not receive
gross marg>
If their profit margin is 30%, then they need to sell 3 1/3 to make up for the shrinkage.
.3 x 3 1/3 = 1
I don't know where you got 34/1.
In the final analysis it's the NET PROFIT not gross profit that determines how many items must be sold to make up the profit loss by shoplifting.
Items in stores are usually priced taking into account shrinkage.
If there is shrinkage, the loss is covered.
If there is no shrinkage, the owner has more income.
But the overhead will be there no matter how many items are sold. Once the overhead is paid for, gross profit becomes net profit.
Overhead will increase as volume increases. There is no such thing as a cost that is fixed and will never increase with volume, given a big enough volume increase all costs will increase.
That is the basic difference between Full Absorption and Variable Cost systems.
If the shoplifting is small, then gross profit is the way to answer the question, otherwise use net profit or maybe something in between to be real scientific.
Cheers, Ken Russell
"Fixed" doesn't mean immutable. But it's constant over long periods of time.
I'm not sure I understand what motivates the transition from one to the other, or what makes a cost accounting scientific.
No, I really don't buy that. As far as I can tell, the logic is that there's some item with a selling price s, and if the net profit is 3% of that, then the number to sell in order to make up for that loss is s=n*0.03*s, or n=1/0.033. In other words, they're using the net profit on an item sold to determine how many items to sell to make up the entire selling price, not the net profit, on a stolen item. They're not comparing the same things.
Here's how I would analyze it. A basic CVP equation is
Sales = Variable expenses + Fixed expenses + Profits
I'll parameterize it a little more economically with x the number of units sold, s the selling price per unit, c the cost per unit to the store, F the total fixed expenses, and P the total profits.
sx = cx + F + P
When an item is stolen the cost to the store increases by c, the replacement cost. F, s, and c remain the same. P remains the same, because the problem is to find the number of additional items to sell to get the same profit. And the number of additional items to sell is n.
s(x+n) = c(x+n) + (F+c) + P
Subtract the first equation and get
sn = cn + c
n = c/(s-c) = 1/(1-c/s)
If the variable cost is 80 cents for every dollar of sales, they must sell
5 items to make up for the loss. The fixed costs are not affected by the loss of an item or the sale of five additional items, so they drop out.Have something to add? Share your thoughts — no account required.
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