In the private-label operating benchmarks section on p. 7 of each issue of the FIR, the industry-low, industry-average, and industry-high benchmarks for the margins over direct costs (as explained in the Help section for this same page) should be interpreted as representing
A the amount per pair of private-label footwear sold that flowed into a company’s retained earnings account (or the amount deducted in the case of a negative number).
B the gross profit earned (or lost–in the case of a negative number) on each pair of private-label footwear sold in the various regions.
C the seller’s net revenue gain (or loss — in the case of a negative number) on each pair of private-label footwear sold to a given region’s chain retailers.
D the net profit earned (or lost — in the case of a negative number) on each pair of private-label footwear supplied to a given region’s chain retailers.
E how much per private-label pair sold in exch region was available to (1) help cover any of a seller’s branded expenses in the region not covered by branded revenues and (2) increase the seller’s operating profits in the region.
The correct answer and explanation is :
The correct answer is:
B. The gross profit earned (or lost–in the case of a negative number) on each pair of private-label footwear sold in the various regions.
Explanation:
The term “margins over direct costs” in the Private-Label Operating Benchmarks section of the FIR (Financial and Industry Report) refers to the gross profit per pair of private-label footwear sold. Gross profit is calculated as revenue per unit minus direct costs per unit (which include production costs and any other directly attributable costs).
Here’s why B is the best answer:
- Definition of Gross Profit:
- Gross profit measures the difference between revenue and the direct costs of goods sold (COGS), without accounting for indirect expenses such as marketing, administrative, or other operating costs. Since the benchmark focuses on margins over direct costs, it directly aligns with the concept of gross profit per pair of footwear sold.
- Why Other Options Are Incorrect:
- A (Retained earnings impact): Retained earnings reflect net income after all expenses, taxes, and dividends—not just direct costs. Margins over direct costs do not directly translate to retained earnings.
- C (Net revenue gain/loss): Net revenue is the total revenue minus discounts and allowances, not the profit margin over direct costs.
- D (Net profit per pair): Net profit accounts for all operating expenses, taxes, and other costs beyond direct costs, which this benchmark does not measure.
- E (Covering branded expenses and increasing profits): While a portion of the margin may contribute to covering other expenses, this answer describes an indirect effect rather than defining the metric itself.
Thus, the industry-low, industry-average, and industry-high benchmarks for margins over direct costs represent the gross profit per pair of private-label footwear in each region.