Gross Margin Checking

Gross margin checking is the measure of line part profitability against predetermined limits. The following terms are associated with the gross margin checking feature:

·      Gross Margin.  The difference between extended selling price and extended inventory cost.

·      Gross Margin Percent.  Calculated as follows:

(Extended Price minus Extended Cost) divided by Extended Price times 100.

Example:

·      Gross Margin Limits.  Define the normally acceptable range for gross margin percent by product class.  The user sets low and high limits for product classes and assigns each sellable part to a product class.  The product class defaults may be overridden at the part/company/warehouse level.

·      Gross Margin Limit Low Value.  A positive decimal value that marks the lowest acceptable gross margin.

·      Gross Margin Limit High Value.  A positive decimal value that marks the highest acceptable gross margin.

·      Gross Margin Exception.  Occurs on a line item when a gross margin percent is outside the gross margin limits.

The gross margin limit high and low values define a range of normally acceptable gross margins for a product class.  The limits are defined by product class and maintained on the Reference File.  These limits define the defaults for each item.

When a change in price or cost for a part occurs, the gross margin is computed and compared to the gross margin high and low values defined for the part's product class.  If the gross margin is found to be outside the acceptable range, the operator is informed of the exception by a screen message.  If the line is entered with a gross margin exception, it is reported on the Price Exception Report.

A gross margin exception for one line item might not result in an unacceptable gross margin percent for the total order.  The user must establish guidelines for profit margins consistent with company policy and objectives.  In general, if a gross margin exception occurs during the automatic pricing of line items, an imbalance may exist in one of the following fields:

·      Base Price

·      Quantity Break Price

·      Quantity Break Discount

·      Customer Discount

·      Gross Margin Limits

Considerations

Gross margin limits provide a flexible means for controlling gross margins for a product class.  A range is determined for each product class, and each part in inventory is assigned to a product class.  The product class ranges provide the defaults for an part, but may be overridden in the Warehouse Balance file Maintenance conversation.  The definition of the range and assignments to product class are determined by company policy and objectives.  The range should act as a guideline for determining line item pricing.  Other factors, such as customer relations, marketing strategy and order volume, also help determine the price.

Consistent gross margin exceptions for a part may imply that the part belongs in another product class.  Consistent gross margin exceptions for a customer imply that the customer's discounts exceed the company standard.

Gross margin limits are key factors in price control and should be set with discrimination.  Too narrow a range produces a large number of exceptions, which masks true pricing errors.  Too wide a range allows all but the most extreme errors to remain undetected.