Chapter 4.1: Cost of Merchandise Sold

Trade discounts may be expressed as one of a "series" of discounts. Each discount is deducted separate. Example:

$48,000 less 40% and 15% or 40 and 15 off

Complement method example

(Use this method) the complement which 100% minus the discount %, is multiplied by the previous balance or preceding net amount

Step 1: Negotiations

Once the retailer has completed the planning process, identified the suppliers, selected the merchandise; retailer must negotiate wholesale prices

Quantity discount is also called what?

Patronage discount; encourages the buyer to concentrate purchases or continue to patronize the same vendor

______ refer to the cash discount and dating. _________ is the time limit for payment of the invoice. Terms of 8/10 means an 8% cash discount is taken if invoice is paid within 10 days from the date. The _______ date is the date the merchandise is shipped.

Terms, Dating, Invoice

When cash discount is the only discount on merchandise, the quoted cost is the same as billed cost. True or False

True

Trade discount also known as functional discount.

When an amount of discount allowed depends on the function of the purchaser (industrial users, wholesale users, retailer, interior designer)

def. discounts

a reduction in price allowed by the vendor

def. vendor

a resource or supplier, a person or a firm such as a manufacturer, importer or wholesaler, from which a retailer purchases goods

The cash discount is deducted _______ all other types of discounts have been deducted.

after

def. vendor

any individual or firm whom the retailer buys merchandise; manufacturer, wholesaler, or even another retailer

Cash discounts

are the percent reduction from the quoted cost allowed for prompt payment of an invoice. it can be taken if the invoice is paid within a period.

The buyer should be familiar with the:

availability of goods, prices offered by vendors' competitors, consumer demand, and legislation that regulates competition and affects pricing policies

The _______ acts as the retailer's agent in dealing with vendors and has the responsibility to represent the retailer in an ethical manner.

buyer

On-percent method example: List price(complements of 40 and 15) = billed cost

calculated by multiplying the complements of the discounts. Billed cost is determined by multiplying the list price by the on percent. a lower percent is better since it will get a lower billed cost

Why is cost of merchandise sold important?

determines a firm's operating profit. Retailers seek to purchase merch. at the lowest possible net cost

def. quantity discounts

discounts allowed when a large specified quantity is purchased; the amount of the discount usually increases as the quantity purchased increases

Direct method example

each discount is taken individually and subtracted from the previous balance or preceding net amount

2. What does the Robinson Patman Act do to vendors?

forbids a vendor engaging in interstate commerce from selling to similar retailers at different prices if both sales involve products of the same quality and grade and if the resulting price difference serves to substantially lessen competition, create a monopoly, or prevent competition

Robinson Patman Act of 1935

important to domestic trade; designed to limit price discrimination and protect small businessesq

Who generally gets the larger or additional discounts than retailers b/c they provide different services in the channel of distribution and purchase in larger quantities?

industrial users or wholesalers

A quantity discount is deducted prior to any other type of discount and is deducted regardless when the _______ is paid.

invoice

Final costs are documented in an _________, the bill that is associated with a shipment of merchandise. It has purchases, prices, important doc., has all terms of sales and is a legal document.

invoice

1. What does the Robinson Patman Act do to vendors?

it prohibits vendors from providing excessive quantity discounts to large volume retailers.

Seasonal discounts

may be given to a retailer for ordering or accepting merchandise out of season; retailers can place orders ahead of buying season; must have storage and money to use this discount; must predict well in advance

Exclusive, specification, and private label buying offer other means of reducing costs in competitive markets. What are private label goods?

merchandise that carry the retailer's label and are sold exclusively by the retailer

National or name brand includes the cost of:

name because of royalties and licensing fees with associated promotional costs

What can the retailer do to reduce the net cost of merchandise?

negotiate for discounts, transportation, allowances, rebates and services

Even after the buyer and seller agree on a wholesale price, this quoted cost is rarely the _____ _______, or exact amount the retailer pays for the merchandise. There may be discounts to reduce the cost.

net cost

Negotiating sales and prices improves the retailer's profit margin and enables retailers to :

offer their customers lower prices and better service.

def. trade discounts

percent deducted from the list price of a vendor

Special buying situations are:

promotional, specification, private label buying may also contribute to greater profit for the retailer

What are the three discounts?

quantity, trade, seasonal and cash discounts

def. billed cost

represents the resultant figure after applying the trade discounts to the list price

The _________ generally pays transportation charges associated with getting the merchandise to the store or the store's distribution center.

retailer

Wholesale prices

the amount the vendor charges for goods, are firmly established by a vendor, the retailer may be able to reduce the net cost of the merchandise by negotiating for discounts, transportation, allowances, rebates and services

Cash discount is taken on billed cost. What is billed cost?

the cost after quantity, trade discounts have been deducted; shown on vendor's invoice and also called gross cost.

Goal is for retail buyers to attempt to negotiate for the best possible discounts especially if:

the discount on desired merchandise is lower than discounts offered by sellers of similar merchandise.

The Robinson Patman act does not forbid quantity discounts when:

the discounts are used to pass on savings that result from manufacturing, selling, and/or packaging larger quantities.

Private label brands have steadily increasing the market share over the years because...

they offer an opportunity for buyers to negotiate much lower costs and gain higher markups than with national or name brands; ability to choose more cost efficient styles, fabrics, and trims to lower cost of merch.

The list price may be set higher than the typical retail price because:

to make customers think that they are receiving a special value

def. list price

vendor's suggested

Retail and vendor must negotiate with:

wholesale prices, terms of sales, transportation, services and stipulations to be included in the purchase contract

What are the three ways series discounts can be calculated?

Direct method, complement method, and on percent method