SALES MARGIN CALCULATION

I have asked this question to my seniors and have been asked this question by my colleagues. I thought I can share my knowledge on the same in this forum, so that it can serve the people looking for knowledge in fundamentals of Retail :

What is Sales Margin ?

It is the gross profit acquired from sales after VAT, in short terms it is earnings before interest, taxes (other taxes incurred by organisation apart from taxes on sale of goods), depreciation, amortisation (EBIDTA) and OPEX (operational expenses)

At times retailers do add their OPEX and other over head expenses as a percentage to the landed cost of the product , thereby leading to higher UNIT COST. So the margin in this case will be NET MARGIN i.e. sales margin after Tax

Sales Margin is always represented in percentage (%)

Below formula will help you understand the calculation of NET MARGIN :

NET MARGIN % = { (NET SALES - COGS) / (NET SALES) } x 100

Where NET SALES = Selling Retail / (1+(vat rate/100))

COGS is cost of goods sold i.e. the unit cost at which the product is being sold

SELLING UNIT RETAIL CALCULATION FROM UNIT COST

Though it is simple, it seemed pretty confusing at first to me. It took a while for me to understand the method to calculate retail price from cost price, in fact when I did Google for the answer I found a lot of wrong answers or formulae online and sadly I did not find the answer I was looking for. Then I used the oracle retail calculation engine to understand how the same is being calculated.

Before going for the complete formula lets understand it step by step. I will explain you the way I understood it, hoping it will provide better clarity on the calculation :

Lets assume :

V - Vat rate 

C - Unit Cost

R - Selling Unit Retail 

NR - Net Retail i.e. selling retail before adding vat rate

M - Net Sales Margin 

Every merchandiser will set a fixed Margin percentage for each category which he would like to attain through sales. For example a buyer has procured a merchandise , lets say Disney soft toy for 1500 Rs. at landed cost. Now the merchandiser while doing the budgeting was to attain a margin of 35% , so he will use the below formula to calculate the Net Retail ;

C = NR -  (NR x M/100)

C = NR{1-(M/100)}

C / {1-(M/100)} = NR    

                      NR = C / {1-(M/100)}           --- this is the formula to calculate Net Retail ---

NR = 1500 / {1-(25/100)} 

      = 1500 / {1-0.25}

      = 1500 / 0.75

      = 2000 

So from the above , we can understand that to the merchandiser will set the Net Retail at 2000 for him to achieve a margin of 25% we can verify the same using the below formula 

             M % = { ( NR - C ) / NR } x 100    --- this is the formula to calculate Net sales Margin ---

M = { (2000 - 1500 ) / 2000 } * 100

    = { 500 / 2000 } * 100

    = 0.25 * 100

    = 25 %

 Now that we have the Unit Cost, Net Margin, Net Retail and Vat Rate we can easily calculate the 

selling unit retail 

R = NR + (NR * V/100) 

   = NR x ( 1+V/100)  

   = 2000 x (1+0.16)

   = 2000 x 1.16

   = 2320 

                        R = NR x ( 1+V/100)           --- this is the formula to calculate Selling Unit Retail ---

The consolidated formula to arrive at the selling unit retail from cost will be below 

                      R = {C x ( 1+V/100)} / (1-M/100)   

   

R = {1500 x (1+16/100)} / (1-25/100)

   = {1500 x (1 + 0.16)} / (1 - 0.25)

   = ( 1500 x 1.16) / 0.75

   = 2320 Rs.