Think about how company income statements usually work: You start with revenue, subtract cost of goods sold to get gross profit, subtract operating expenses to get operating profit, and then subtract taxes, interest, amortization, and depreciation to get net profit. The gross profit is the profit after subtracting all production costs for the items that were sold. This number gives a manager a measure of profitability accounting for the company\u2019s leverage because fixed costs for the goods sold is included in the costs of goods sold calculation. Gross profit can be used in making financial decisions regarding financial structure, however, gross profit does not indicate how well each product contributes to covering fixed costs. When trying to find how an individual product or service is performing, a manager can use contribution margin to ascertain whether a product is worth the fixed costs being used to produce it. Contribution margin will show the profit for the sale of an individual item calculated by taking the net sales and subtracting the variable product costs and variable period expense. The net of the contribution margin is now the money that can be used to \u2018contribute\u2019 towards covering fixed costs. If there is still money left over after paying for fixed costs, then you know that the individual product or is profitable.<\/p>\n
Nike has dealt with the rising competition in the global sportswear apparel market seeing flat growth in the last two years, especially in the footwear segment. Nike recently made a change to move away from selling to wholesale distributors and towards selling directly to customers through its website and new partner, Amazon. Jamie Merriman, an analyst at AB Bernstein, estimated gross margins in Nike\u2019s DTC business are 62 percent, compared with 38 percent in its wholesale business (https:\/\/www.reuters.com\/article\/us-nike-stocks\/nike-at-two-year-high-as-analysts-tout-margin-benefits-of-direct-sales-idUSKBN1F82E1<\/a>). Nike executives emphasized the company\u2019s ongoing plans to sell more goods digitally and directly to consumers, a shift from its longstanding model of selling through sporting-goods stores and other traditional retailers. As revenue per unit increase dramatically by cutting out the middleman while variable costs per unit are increased only slightly because of selling and transportation costs, Nike is seeing higher contribution margins per unit of product. Nike saw its stock soar in late 2017 because of the partnership with Amazon and direct sales through its own website. Devoting resources to building its direct sales pipeline should will actually increase its variable costs because of transportation, but the additional revenue from selling directly to customers will outweigh these variable costs and ultimately increase contribution margin per unit. As long as Nike can consistently fulfill its online orders on-time and maintain its supplier relationship with Amazon, it will stay afloat in the changing consumer landscape (https:\/\/www.wsj.com\/articles\/nike-tells-investors-it-will-shift-away-from-mediocre-retailers-1508967034<\/a>).<\/p>\n","protected":false},"excerpt":{"rendered":" Think about how company income statements usually work: You start with revenue, subtract cost of goods sold to get gross<\/p>\n","protected":false},"author":3706,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"colormag_page_layout":"default_layout","footnotes":""},"categories":[71160],"tags":[],"class_list":["post-197","post","type-post","status-publish","format-standard","hentry","category-making-decisions-defining-process-strategy"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blog.richmond.edu\/mgmt340-03\/wp-json\/wp\/v2\/posts\/197","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.richmond.edu\/mgmt340-03\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.richmond.edu\/mgmt340-03\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.richmond.edu\/mgmt340-03\/wp-json\/wp\/v2\/users\/3706"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.richmond.edu\/mgmt340-03\/wp-json\/wp\/v2\/comments?post=197"}],"version-history":[{"count":0,"href":"https:\/\/blog.richmond.edu\/mgmt340-03\/wp-json\/wp\/v2\/posts\/197\/revisions"}],"wp:attachment":[{"href":"https:\/\/blog.richmond.edu\/mgmt340-03\/wp-json\/wp\/v2\/media?parent=197"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.richmond.edu\/mgmt340-03\/wp-json\/wp\/v2\/categories?post=197"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.richmond.edu\/mgmt340-03\/wp-json\/wp\/v2\/tags?post=197"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}