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BRL-010: Buying and Merchandising-II

BRL-010: Buying and Merchandising-II

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Assignment Code: BRL-10/TMA/2021-22

Course Code: BRL-10

Assignment Name: Buying and Merchandising - II

Year: 2021-2022

Verification Status: Verified by Professor

Marks: 100


Q1) Describe different types of merchandise and give the examples of each type.

Ans) End users are exposed to a wide range of commerce and consumer goods. Understanding these sorts will go a long way toward finding the best techniques for selling each of them. Consumer goods/merchandise split into four subgroups as mentioned here below:

Routine or Convenience Products

The features of routine or convenience products are:

  1. These are objects that are purchased and utilised on a regular basis, such as daily usage items.

  2. These items are purchased as quickly as possible, in modest quantities, and with as little effort as feasible.

  3. These are not high-priced items, but rather inexpensive ones.

  4. These items are acquired for their intended function.

  5. These products can be found in a number of locations and retailers.

Staple goods, impulse goods, and emergency goods are the three types of convenience products. Most food and grocery items are staple goods/merchandise that are purchased on a regular basis. Impulse purchases are made on the spur of the moment, without any prior planning. The product itself, as well as its display, packaging, and price, are all key factors in the selling of such items. Emergency products are things or merchandise that are required immediately due to an emergency or unforeseen requirement. These things can be acquired at a higher price or at any price that is currently offered. A pain reliever or a headache reliever, for example.

Shopping Products

The features of shopping products are as follows:

  1. These are the items for which the customer has invested a significant amount of time and effort in purchasing.

  2. Before making a purchase, consumers are prepared to shop about and examine features and costs of rival products.

  3. These are less usually purchased.

  4. These items are pricier and can only be found at a few select stores.

  5. Personal selling by the shop sales representative is required for some products.

  6. These items include televisions, automobiles, home appliances, and houses, among others.

Specialty Products

The features of specialty products are as follows:

  1. Consumers place a high value on these things because they have strong emotional attachments to them, and they go to great lengths to locate them.

  2. Customers are adamant about not accepting a substitute for their favourite goods.

  3. Retailers play a critical role in the sales of these products since they require sales personnel who are knowledgeable about the products. They are willing to go above and above to understand the demands of their customers.

  4. As a result, the marketers of these commodities restrict their distribution in order to assure robust shop sales support.

  5. Stereo equipment, a giant digital television, musical instruments, and some branded men's apparel are among them.

Unsought Goods

The features of unsought goods are as follows:

  1. These are products that most people aren't aware of, and even if they are, they haven't considered purchasing.

  2. For example, many consumers are aware of certain medical services or accident insurances but do not seek them out. The same is true of encyclopaedias, which are well-known but not particularly sought after.

  3. As with insurance sales agents, these commodities require a lot of compelling advertising and a lot of work at the personal selling level.

Q2) Describe the present scenario of the organized retail sector in India. What are its future prospects?

Ans) The types of products sold in India's retail sector, as well as the retail formats used to promote them, are changing. Both the categories available on retail counters and the creation of new retail formats have advanced significantly during the last decade.

Currently, India's fashion industry controls the majority of the country's organised retail sector. This is consistent with the growth of retail in other parts of the world, where fashion led the way in the early phases of development. Other categories such as Food & Grocery, Durable, and so on followed.

Clothing and Textiles Spending by Consumers

  1. In the organised retail sector, consumer spending on apparel, textiles, and fashion was at Rs 18500 crores in 2006.

  2. This spending accounts for around 34% of all spending in the organised sector.

  3. Clothing and other consumer expenditures have increased by around 30%.

  4. Clothing spending is expected to reach Rs 2872 billion by 2025, according to a Mckinsey analysis, with a CAGR of 6.4 percent.

Food and Grocery Scenario in the International Market

Over a number of decades, the international retail landscape has transformed as a result of a succession of economic and political upheavals. It acts as a torch bearer for the Indian retail business, guiding it through various stages of progress. The share of food and grocery in the total business of big retail chains operating in the US and European markets will be fascinating to investigate. Food and Groceries is the greatest spending category for Indian customers in terms of the Indian market (which form about 50 percent of the total expenditure by Indian households). We expect organised retail in Food and Grocery to develop at an exponential rate now that all of the basic drivers and effective pan-India retail models are in place.

From 2001 onwards, the successful growth of value-based ideas like Big Bazaar, Giant, and Spencer, as well as the development of retail space in smaller cities and towns, would propel organised retail into the next levels of cities. Small towns with populations of 5 to 10 lacs are experiencing a significant rise in disposable income. This, combined with high aspirational levels, leads to more consumer expenditure and decreased reluctance to loans. As a result, there has been an increase in the use of credit cards for retail purchases.

Big Bazaar - The Hyper Market Chain

Pantaloons Retail (India) Limited (PRIL) first opened its doors in India in 2001. Within a three-week period, the first store opened in Kolkata, followed by stores in Hyderabad and Bangalore. During the first year, the three hypermarket outlets generated a sales turnover of over Rs 43 crores and a profit of over Rs 2.89 crores for the PBDIT.

The launch of the Big Bazaar chain of stores was the consequence of top management's insight. Top management knew that in the retail industry, volume was important, which could not be achieved through lifestyle retail models. The volumes would come from the ever-increasing middle-class population, which would need to be accessed. As a result, Big Bazaar discount stores were established to cater to the needs of middle-class shoppers. In just two years, the company added Food Bazaar to further increase its penetration among middle-class clients. Let's take a look at Big Bazaar's plan.

Market Environment: To meet the needs of the Indian market, PRIL's management opted to make improvements to the concept of hypermarket outlets. The management conducted a thorough analysis of the product mix offered by Kirana stores as well as a chain of cheap stores known as Sarvanana stores that operated in Chennai and other cities in the 1990s. There were few Indian models available at the time of Big Bazaar's inception, with the exception of Giants, the RPG hypermarket, which had only opened two months prior in Hyderabad.

Strategy of Big Bazaar: The Indian consumer is prone to cutting costs, which is the misery of Indian credit card issuers. PRIL's management saw an opportunity to capitalise on this concept and opted to provide value to the consumer. As a result, the Big Bazaar hypermarket concept was born.

The term Big Bazaar was inspired by the concept of a bazaar or market place, where a customer would go if he needed to make a large number of purchases. Due to the large variety of products offered by different merchants in the bazaar, he may be certain of reasonable prices for the things of interest. Bara Bazaar (which translates as "great bazaar") is well-known in Kolkata for offering a diverse range of merchandise at wholesale pricing.

As a result, despite the traffic bottlenecks and other difficulties, customers opted to visit this market for the obvious reason of saving money. As a result, management planned to imitate a similar model, in which product offers and prices would be extremely competitive. In some situations, this may be even less expensive than the prices supplied by stores in the bazaar. Big Bazaar stores gained instant recognition as a result of this method. At Big Bazaar stores, price became the primary value proposition. As a result, a tag line was developed to emphasise this value proposition: "Isse sasta aur achchha kahin nahin."

Buying and Merchandising Process at Big Bazaar: At huge Bazaar, the majority of product categories were purchased mostly on the basis of price. The management's goal was to provide high-quality items at the lowest possible cost. The management used a "market-breaking" price strategy to achieve this strategic goal. To do so, the team would first determine on a pricing for a category that would provide genuine value to buyers, based on its study. Once a category's price has been decided, the procurement team will begin looking for potential sources that meet both the quality and price criteria. As a result, the pricing policy of Big bazaar's procurement and merchandising staff will be based on value pricing and maintaining quality.

Food Bazaar: The management was confident that, based on the international pattern, the food industry would be one of the fastest expanding sectors in the Indian retail market as well. The distinct notion that food and all of the categories within it would never go out of style was at the root of this phenomena. In reality, this could open up a lot of possibilities for increasing the categories. The fact that Indian families spend about 53% of their entire income on food gave the corporation a compelling incentive to consider joining the food retailing market.

As a result, the firm chose to open Food Bazaar during the first year of the Big Bazaar store's operation. The firm anticipated that the addition of Food Bazaar would significantly improve the store's foot traffic. In terms of strategy and expectations, management was spot on. Customers could touch, feel, and even taste the products on offer at the Food Bazaar, which operated on the style of a "Indian Mandi." These products were supplemented by additional packaged goods in order to provide the full range of food needs of middle-class consumers.

Q3) Define different types of mark-ups and explain differences between them.

Ans) Types of Mark-Ups are:

Initial Mark Up

This mark-up defines the price at which the product is offered to clients after it has been purchased at a given price. Initial mark-up refers to the mark-up that is applied to products when they are first received in the store. The intended mark-up is also known as the initial mark-up. Many expenses may have to be calculated when setting initial mark-up based on the retailer's experience with other product categories or similar product categories.

Initial Remarks (Percentage Expenses + Percentage Profit + Percentage Reductions) = Percentage + Percentage Alteration Expenses – Percentage Cash Discounts) ÷ (Percentage Sales + Percentage Reduction) ............. (i)

MRP or retail price can be calculated on the basis of the cost price and retail mark-up as follows:

Retail Price or MRP = Cost of Purchase/(1- Mark-up per cent on Retail price) ............... (ii)

Initial mark-up percentage can also be determined from any of the variations of the earlier formula as follows:

Initial mark-Up Percentage on Retail Price = (Operating Expenses + Net profit + Markdowns + Shrinkages + Employee and Customer Discounts + Alteration Costs – Cash discounts) ÷ (Net Sales + Markdowns + Shrinkages + Employee and Customer Discounts) × 100 ............ (iii)

Initial mark-Up percentage on Retail Price = (Gross Margin + Reduction+ Alteration Costs – Cash Discounts) ÷ (Net Sales + Reduction) × 100 ..... (iv)

Maintained Mark-Up

On initial mark-up, it is determined to compute anticipated operational expenses, planned profit, and planned reduction based on specific estimated expenditures. These are used to calculate the retail or MRP of items in a specific category by determining the initial mark-up percentage. As a result, the actual mark-up or the maintained mark-up achieved at the end of the operation cycle must be calculated (say, at the end of six months to one year).

This is calculated by determining the actual expenses incurred under various headings throughout the course of a specific time for which the sustained mark-up is to be determined. As a result, 'Maintained Mark-up' can be defined as the actual mark-up derived from actual expenses and outcomes at the end of the business cycle, season, or financial year.

Let's start by defining the formula for computing the real percent mark-up:

Maintained Mark-up Per cent = (Net Sales Value – Gross Cost of Merchandise Sold) ÷ Net Sales Value …..(v)

According to Easterling et al., the gross cost of merchandise sold is the correct basis for determining maintained mark-up, and cash discounts and work room costs such as alteration costs, etc. are not to be incorporated in the merchandise cost calculation. Freight, octroi, and loading/unloading expenses will also be included.

Using the formula below, we can also calculate the aforesaid percentage number from the net average selling price:

Maintained Mark-up Percentage on Retail Price = [(Actual Retail Operating Expenses + Actual Net Profit + Actual Retail Reductions) ÷ (Actual Net Sales) × 100] ............. (vi)

The denominator only includes the net sales value and excludes other charges such as markdowns, shrinkages, employee discounts, and so on. Because the % markup was calculated on the retail price in the previous scenario (when computing first mark-up), the net sales statistics were taken as 100. Then, in order to arrive at the correct mark-up percentage on retail price, markdowns, shrinkages, and employee discount figures were added to the same (as these figures were subtracted from the retail value of the product).

However, in the case of maintained mark-up, the actual net sales value must be considered in order to compute the actual mark-up attained. These include client and employee discounts and markdowns. The sales figure is calculated after subtracting all markdowns and discounts.

The following formula can be used to compute the retained mark-up percentage:

[Maintained Mark-up Percentage = (Average Selling Price – Merchandise Cost) ÷ (Average Selling Price) × 100] ............. (vii)

The goal of calculating maintained mark-up is to figure out what kind of final profit margin may be predicted from a given product category. We can determine the maintained mark-ups for each product category, department, or retail shop in order to conduct a comparative analysis of the efficacy of merchandising policies. The teams are in charge of dealing with the relevant category, department, or retail shop.

Cumulative Mark Up

The cumulative mark-up is the average mark-up gained on items sold over a period of time or during a season. As a result, in order to calculate cumulative markup, we must start with the opening inventory value, both at retail and at cost.

Following that, as the season progresses, we must continue to include gross new purchases (i.e. purchases plus other expenses such as freight) made during the specified period and factoring them into the total retail merchandise. If there is a change in mark-up policies or markdowns effected during the season or given period, the retail merchandise value will be impacted as well. As a result, the difference between the entire retail value of items sold during the season and the total cost of merchandise sold can be defined as cumulative mark-up.

Thus, Cumulative Mark-Up Per Cent = Cumulative Mark-Up Value ÷ Cumulative Retail Value

Q4) How do markdowns affect the profitability of the retail business? How is net markdown calculated?

Ans) In fact, category management's only aim as part of the merchandising process is to avoid all such erroneous decisions and significantly lower the reduction % in the initial mark-up. Markdowns result in a loss of value for the product category and, as a result, a decrease in the retailer's net profitability. As a result, the better the category management, the lower the reduction. As a result, the original mark-up will be decreased, resulting in lower product prices. Lower product prices result in higher category sales and, as a result, higher profits for the retailer.

When a retailer must take regular markdowns, he must factor these markdowns into the initial mark-ups. This elevates merchandise pricing from the outset, which has an impact on sales turnover and, as a result, profitability.

It's worth noting that the store benefits twice because of the lower markdown percentage. This effectively suggests that the merchandising team is very good at controlling merchandise categories. As a result, there is a higher rate of sell-through and turnover. Better sales mean bigger profit, which leads to a reduction in the initial mark-up percentage and, as a result, better pricing, which leads to even better sales. Furthermore, there are no hidden reductions in the net profit percentage owing to last-minute markdowns or decrease sales. As a result, the larger percentage of reductions or markdowns might be viewed as an opportunity cost of the merchandising team's poor category management.

Many times, a store must cancel a particular markdown on certain items, implying that the markdown % must be revised. When the retailer is left with unsold products at the end of a special sale period, this becomes required. In order to make customers aware of new things featured in the store and persuade them to try them, the merchant may markdown select items as part of an introductory sale of those items. Once such things become popular or become part of a customer's regular purchase, the shop may opt to reintroduce them at standard price.

As Easterling C R correctly said, "Markdown cancellation is the upward price change that is countered against a previous markdown." As a result, in the event of a markdown cancellation, the percentage cancellation must be lower than the previous markdown percentage applied to the specific items. As a result, net markdown is the difference between the markdown value previously established on a range of products and the markdown cancellation later agreed on balance items from the provided range after the sale or for a specific period of time.

The following is the formula for determining net markdown:

Net Markdown Value = Total Markdown Decided Prior to Sale Period – Markdown Cancellation on the Balance Items

Q5) What is meant by stocks? Describe different methods that are commonly used for determining it.

Ans) A stock (sometimes called equity) is a financial instrument that reflects ownership of a portion of a company. This entitles the stockholder to a share of the corporation's assets and profits according to the amount of stock they own.

The different methods that are commonly used for determining it:

Stock Turnover or Sales to Stock Ratio

Stock turnover can be calculated in retail or cost terms, as well as in quantity terms. Most merchants utilise retail value as the basis for computing the stock turnover figure, as explained in the section on "Inventory Valuation Methods." Only if all of the items covered in the amount have the same price per unit may stock turnover on a quantity basis be used. Quantity-based stock turnover is also utilised for big electronic items like as cell phones, washing machines, and refrigerators, as well as furniture and automobiles of comparable type and value.

The following is the formula for calculating stock turnover or sales-to-stock ratio at retail value:

Stock Turnover or Sales to Stock Ratio = Net Sales Value at Retail for a given period ÷ Average Stock Value for a given period

Calculating average stock value: This is a crucial factor to consider when calculating stock turnover, thus it must be done in a systematic manner. The total of "stock at the beginning of a period" plus "stock at the end of a period" divided by two is the average stock for a certain period of time. However, as we all know, there are times within a particular period when sales are poor, and as a result, the retailer must hold lesser stocks to match his inventory return on investment. In most cases, the average stock value is estimated over a six-month period or a year. However, there may be months where the inventory carried is lower than usual due to fewer sales. To arrive at the correct average value, the effect of lower performing months' inventories must also be included.

As a result, in this example, the formula to employ is as follows:

Average Stock Value for a given period = (BOM stock value for each of the months in a given period + EOM stock value for the last month in a given period) ÷ Number of months in a given period + 1

Basic Stock Method

Basic stock is the number that is kept in the store or department at all times, regardless of the level of sales for a particular product or category. This number serves as a buffer between the required sales quantity and the anticipated sales target. As a result, basic stock can be defined as the quantity of reserve stock that must be kept on hand at all times.

The operation of the basic stock technique, which takes into account the stock required to cover sales for the month or a certain time (for example, a week or two weeks), as well as reserve stock.

As a result, the formula for calculating the stock that must be kept at the beginning of the month is as follows:

Beginning of month stock = Sales for the month + Basic stock

The basic stock figure is derived from the average stock figure for a given season or period and the average monthly sales for the season/period as shown here below:

Basic Stock Value = Average Stock Value – Average Expected Monthly Sales

Week’s Supply Method

The week's supply approach is mostly utilised by departmental and supermarket formats to ensure that the supply position for a given item is in place. Weeks' supply approach gives the procurement and merchandising team a clear picture of stock coverage at any given time. If the circumstance requires it, the team may take appropriate action. In India, the majority of large format stores maintain a 12-week garment coverage. Keeping a week's coverage is particularly advantageous for supermarkets, where many of their items are used on a frequent basis. They may be carrying two weeks' supply for a single item. As a result, they can keep a careful eye on the supply situation in connection to sales. The average stock to be kept in the store in terms of weeks coverage will be determined by the sales to stock ratio. This could also be the intended stock turnover ratio for the season or year.

Stock to Sales Ratio

This is a different method of determining stock coverage for a certain period, similar to the weeks' supply method. It is a stock on hand at the start of the month in relation to the month's sales. This ratio indicates how many times the month's sales have been covered. Assume the merchandising team has opted to keep a particular level of stock coverage for the month's predicted sales. In this situation, the retail store team will have an easier time organising their stock position at the beginning of the month.

The following is the formula for calculating the Stock–Sales ratio:

Stock to Sales Ratio = BOM stock value ÷ Sales for the Month

In most cases, this ratio is employed for a short amount of time, such as a month or weeks. It allows for a fast assessment of stock levels in relation to predicted sales for a certain time period. This ratio takes into consideration the beginning of the month or period stock value since we need to monitor stock position in relation to predicted sales for a certain time.

If we have the expected sales for the month and the expected ratio to be achieved for the month, we can derive the beginning of month stock value using the method given above, as explained below:

BOM Stock Value = Expected Sales Value for the Month × Expected Stock to Sales Ratio for the Month

Q6) What is the significance of maximum quantity in the reorder system? Explain its various elements.

Ans) It's the quantity you can order up to. The maximum or provision quantity is the amount that must be made available at any given moment – on hand plus on order (particularly at the time of re-order). M is never on hand at any given time because there is always a constant flow of things being received and daily sales being made.

The following is the formula for calculating the maximum quantity:

Maximum = Rate of sales (Reorder period + Delivery period) + Reserve

The reorder method is an important component of unit planning. In this case, the corporation or retailer decides to count inventory at the SKU level in a certain sub-category. This is done to get the required quantity break-up at all dimensional levels.

The following is the basic formula for computing reorder quantity:

Order quantity (OQ) = Maximum quantity – Quantity on-hand – Quantity on-order

The maximum or provision quantity is the amount that must be made available at any given moment – on hand plus on order (particularly at the time of re-order). M is never available at any given moment. There is always a constant flow of things arriving and sales happening on a daily basis.

Q7) Explain the concept of comparative analysis. How does it help in assessing the growth of a store?

Ans) Comparative analysis is the practise of comparing items and identifying similarities and differences between them. When a company wishes to evaluate an idea, problem, theory, or topic, it can use a comparative analysis to gain a better understanding of the problem and develop strategies to address it.

This form of study could be used by a company to look at things that have evident disparities or items that have both differences and commonalities. This research could be used by healthcare companies to compare and contrast two distinct types of drugs, for example. Other businesses might do a comparative analysis to see which of two production processes is the most efficient. In most cases, a company will do a comparative analysis to determine:

  1. The strategies of indirect and direct competitors

  2. The financial health of a business, including its investments and profit margins

  3. Accounting strategies, such as budgets

  4. How trends affect a target audience

  5. Emerging opportunities in technology, marketing, or related functions

This is one of the most basic sales analyses that any store performs to understand its performance in comparison to the same period the previous year. The analysis can be performed at the store's overall sales for the season or on each of the major product categories. The comparison is done for a specific time period, such as weekly, monthly, or quarterly, as well as on a cumulative basis, from the beginning of the season to the present.

The following formula is used to determine the month's sales performance in terms of percentage growth or reduction in terms of value or quantity:

Comparative Sales Performance for the Month = (Sales for the Current Month – Sales for the Previous Year Same Month) ÷ Sales for the Previous Year Same Month × 100

Growth of a Store

Cumulative Sales: The total sales data offer us the total sales for the time period in question. If the total sales are for the season, we must gather sales numbers from the beginning of the season to the present. In comparison to the tactics or strategic inputs used for the concerned period, the comparative sales numbers for the cumulative period offer us with a more realistic sales performance for the season. The cumulative sales numbers as of date provide us with the correct state to know the performance of the strategic inputs or tactics utilised as part of the retail strategy. The advantage of adopting cumulative sales numbers is that seasonal ups and downs are normalised or averaged out over a longer period of time.

The current negative trend is a major problem for the merchandising or retail teams, since it signals that something is badly wrong with the strategy or techniques. This necessitates rapid strategy/tactics correction or improvement. The general sales trend for each store, whether negative or good, tells us about the store's overall performance and how it is likely to perform by the conclusion of the period or season.

The comparison may indicate that the categories with a negative growth tendency require immediate attention from the buying and merchandising staff in order to improve their promotion techniques. Another crucial indicator for the buying team is a negative growth tendency. The concerned product category may not be as popular this season as it was the prior season. The team will then need to investigate the reasons for the reduction in sales of the concerned category, including pricing, quality, design, styling, and content. Other characteristics/factors may have an impact on consumer preference for the category.

The following formula should be used to calculate the cumulative performance of the stores or categories in percentage increase or decline:

Cumulative Performance of the Store/Category = (Cumulative Sales for the Current Season – Cumulative Sales for the Previous Year Same Season) ÷ Cumulative Sales for the Previous Year Same Season × 100

Comparison with the Targets: The team gets a clear indication by comparing the cumulative or current month's sales data to the target sales figures. The indicator may be if sales are progressing according to plan or whether they are falling short for any stores or categories. To ensure that the aims are not out of touch with reality and objectivity in the current circumstances, they must be founded on particular criteria. Then, by comparing sales to target, the team can provide an accurate assessment of success, whether it's in terms of overall store sales or sales per category. Negatively performing stores or categories will need to be thoroughly investigated in terms of all relevant factors that influence performance. The targets can be adjusted to reflect the new circumstance, bringing the comparative analysis closer to reality.

The formula for assessing comparative sales performance in terms of growth or fall percentage in relation to a monthly or cumulative target is as follows:

Comparative Sales Performance with respect to Target = (Sales for the Current Month or Cumulative Sales – Target Sales for the Month or Cumulative Period ) ÷ Target Sales for the Month or Cumulative Period × 100


Q8) Explain direct and indirect expenses with suitable examples. When do direct expenses change to indirect expenses?

Ans) Direct Expenses

Direct expenses are those incurred as a result of the existence of a retail store or a specific department. If the retail store or department does not exist, these costs will be eliminated. Thus, expenses such as salaries and wages for selling and non-selling employees (such as helpers/housekeeping/maintenance employees), store electricity and water bills, packaging and supplies material, store repair and maintenance, staff welfare expenses, store rent and insurance, Octroi for goods brought in to the store and other municipal charges paid for the store, advertising and sales promotion expenses incurred for the store; all of these expenses are incurred for the store.

These charges will vanish as soon as the store closes. It should be noted that salaries paid to purchasing and merchandising personnel are not included in the direct expenses. These costs aren't considered direct at many retailers because the people who work in this department are based at the headquarters and aren't accountable for the day-to-day operations of the store. Instead, it manages the chain's other stores. However, if these employees are actively involved in the store's operation and work there, their salary will be classed as direct. In fact, if the store is a single store at a single location, all running expenses will become direct expenses as well.

Indirect Expenses

As the name implies, indirect expenses are unrelated to the running of the business or the department in question. Even if the store or department closes, these costs will be incurred. Expenses that were not classed as direct in the previous section and are listed below are examples of indirect expenses:

  1. Salaries paid to merchandising and buying teams;

  2. Salaries paid to management staff;

  3. Consumption of stores and packaging material;

  4. Advertising and Sales promotion expenses;

  5. Insurance;

  6. Travelling and local conveyance;

  7. Storage and warehousing expenses;

  8. Deficit on assets sold/scrapped

  9. Bad debts;

  10. Miscellaneous, etc.

Indirect expenses for a store that is part of a chain include expenses such as advertising and sales promotion, rent, and utilities expenses that are incurred in general for the head office as well as other stores. Based on its sales turnover or store area, a corporation may elect to assign a particular amount of these indirect expenses to the concerned retail store.

Example: Allocating Direct and Indirect Expenses

A shop with two stores, store A and store B, each of which is 400 square feet and 600 square feet. Store A's sales turnover is 5 lacs, while Store B's is 8 lacs. Store A has a direct expense of 1 lac, while Store B has a direct expense of 3 lacs. The indirect expenses are distributed based on the size of each store. The overall indirect costs are estimated to be Rs 3 lacs. The gross margin percentages for stores A and B are 50% and 40%, respectively. What is the profit margin for store A and store B in percent?


Rs (Store A)


Rs (Store B)


Sales income





Less :Cost of goods sold





Gross margin





Less: Operating expenses






(see a below)


( see b below)

Total Operating expenses





Operating profit





The indirect expenses of Rs 3 lacs are to be divided on the basis of area of each store. Hence, we need to find the percentage area of each of the stores.

The total area for two stores = 400 + 600 = 1000

Percentage area of store A = 400 ÷ 1000 = 40%

Percentage area of store B = 600 ÷ 1000 = 60%

  • The indirect expenses to be allocated to store A

= 40% × Rs 3,00,000 = 40/100 × 3,00,000 = Rs 1,20,000

  • The indirect expenses to be allocated to store B

= 60% x Rs 3,00,000 = 60/100 × 3,00,000 = Rs 1,80,000

As a result, despite having a smaller turnover than store B, store A is profitable. As a result, in order to cover operating expenses and make a profit, store B must increase its gross margin or increase its sales turnover.

Q9) Explain the steps involved in the development of new products. Describe advantages and disadvantages of the product development.

Ans) Steps Involved in Development of New Products

Sales Analysis: Before deciding on a product to develop, this is the most critical phase. The merchandising team will be required to conduct both research and analysis of product data. The team can use the procedures below to determine which products they need to introduce in their store.

  1. Research data from trade associations and other sources is analysed to determine the predicted sales trend in product categories in terms of percentage and volume increase.

  2. Examine the sales trends of brands that sell the products/items in question as part of their brand assortment in their stores. The team will be able to see the growth of different items on an annual basis thanks to the sales trend analysis.

  3. Within each of the brands, the trend will also show the volume of various sub-products. These figures correspond to various pricing ranges in which the sub-products are sold.

  4. The data gives the merchandising team a clear picture of which products to pursue for product development. The research will also reveal trends for new items that have the potential to flourish in the future.

  5. Product research on competitive retail stores or chains that have strong sales and growth prospects.

  6. Visits to trade events, overseas marketplaces, and shows will help generate fresh product ideas for development.

Briefing Design Development Team: This is the next crucial step the merchandising team must do in order to put its new product identification into action. The following details should be provided to the design development team in order for the designing team to produce meaningful product design drawings:

  1. The material or other important ingredients of a product, as well as the kind or type of product. For example, in the case of garments, the merchandising team must indicate whether it is made of cotton or a blend of materials, and so on.

  2. In terms of distinctive features, how many separate products and sub-products are required? For instance, in a skirt, whether it should be tight or regular, and what different features, such as laces, embroidery, or designs, should be included.

  3. What are the price points for each of the essential products?

  4. What size specifications are necessary for the product? For example, 100 gramme or 200 gramme soaps or tooth paste, or clothing in small, medium, or big sizes.

  5. How will the product fit into the existing line, giving it a strategic edge in terms of selling and carving out a place for itself?

  6. What specific function the product should be able to fulfil or what distinguishing qualities it should possess. For example, if the soap should be used as a face wash, a cosmetic product, or a skin toner.

  7. Coordination of the product with other products. For example, a skirt to match a T-shirt or blouse, or a belt to match the trousers or shoes.

  8. The manner in which the item will be displayed in the store. The type of display fixtures/browsers that will be used.

  9. The designer team should be aware of any packaging requirements or constraints. Toys, for instance, must be wrapped in non-plastic materials.

  10. Minimum quantity requirements, as well as the design's mass-producibility, should be considered. For example, certain print designs may not be appropriate for creating extremely small quantities, or the type of print required may not be appropriate for the end product's pricing objective.

  11. What kinds of drawings must be provided to the manufacturer? Whether it's technical designs or intricate sketches, each graphic is displayed separately.

Briefing to Manufacturer or Supplier: If a briefing is required, it will be determined whether the briefing is to be given first to the supplier's design team or immediately to its manufacturing team. Many suppliers have their own design team to deal with product development requests from their major customers. In this instance, the previously discussed points must be communicated to the supplier's design team.

When it comes to briefing the manufacturing team, the first step is to do a feasibility analysis. The time required to complete the order's manufacturing; the cost of development (production set-up and machinery requirements), the production processes and material use; and the minimum quantities required as part of the batch size for cost effectiveness will all be part of the feasibility study.

Following the initial feasibility study, the design development team should describe the essential features of the product design to the manufacturing team. The team may also advise improvements to make the product more cost-effective without sacrificing the product's essential design characteristics.

Study of Supplier’s Capability: This is a critical evaluation of the providers before determining who is best suited to produce the desired goods. Knowing and evaluating a supplier's expertise in many parts of product design gives the buying and merchandising team a comprehensive picture of the products to be given. The team must be clear on the evaluation criteria, as choosing the wrong supplier will not only cause delays in the manufacturing process, but it may also impair the quality of the finished product. If the product design allows for a trial sample, the purchasing team can identify potential suppliers for a trial sample before settling on one.

Time Factor: The availability of time for product introduction can also influence supplier selection. Whether you import from China or Bangladesh at a lower cost but with a longer lead time or build it locally, even if it is more expensive, will almost likely be determined by the product's debut date. Many retailers and businesses begin product development at least six months to a year ahead of time.

Cost effectiveness: It is vital to evaluate the product development cost in relation to the sales plan for the product in question. From the product life-cycle point, does the product have a longer or shorter lifespan? Because of the short product life cycle, it will be better to source such products if the product development cost will account for a significant percentage of the overall sales of the product. However, if the product has a longer life cycle and the ability to grow over time, the development costs can be amortised over time. As a result, by dividing the development cost by the entire estimated quantity to be sold over the product's life cycle, the overall cost per piece is kept low.

Product Sampling: It is vital to evaluate the product development cost in relation to the sales plan for the product in question. From the product life-cycle point, does the product have a longer or shorter lifespan? Because of the short product life cycle, it will be better to source such products if the product development cost will account for a significant percentage of the overall sales of the product. However, if the product has a longer life cycle and the ability to grow over time, the development costs can be amortised over time. As a result, by dividing the development cost by the entire estimated quantity to be sold over the product's life cycle, the overall cost per piece is kept low. Take a look at Example 9.1 to see how it works.

Market Test or Trial Run: The market test may include the expense of conducting a trial run in a few select stores to see if the product's sales response is as expected. This makes it easier to complete the product's full run and realise its full potential.

The trial run has both positive and negative aspects. The benefits are as follows:

  1. Lowers the investment risk as committing to higher quantities is avoided;

  2. Decision about discontinuing the products in the existing brand.

The disadvantages are:

  1. High cost of production due to lower quantity production;

  2. Risk of competitors picking up on cues and over-reaching customers, causing the retailer to lose out on first-mover benefits;

  3. Due to the restricted trial period, the store may not be able to fully promote the new product in the market. As a result, all of the above considerations must be taken into account when conducting a test run.

Specifications: It will be beneficial to keep written, mutually confirmed, and signed product specifications with both the supplier and the retail merchandising team in order to ensure that product quality is maintained consistently throughout its life course. Many shops use a third-party confirmation of specification by having a certified and certifying authority conduct a proper quality check. Regular quality checks ensure that the consumer receives the goods that the shop has promised, boosting consumer confidence and brand loyalty.

Type of Packaging: The merchandising staff must provide careful consideration to product packaging, ensuring that all critical product features are prominently displayed and that all necessary information is delivered to consumers. Innovative packaging can sometimes help enhance product sales and placement in the minds of consumers. If the package development cost is significant, it can also be amortised. While developing the product, the design team must take the packaging in mind to guarantee that the product presentation is at its best when presented in the store. The shop must also consider any legal requirements, if any, in order to avoid future legal issues.

As a result, it makes sense for a retailer to consider all of the aforementioned factors when developing products as part of its own label development programme. Due to the intrinsic benefits of the endeavour, a proper decision-making method for product development will yield higher returns to the store.

Advantages and Disadvantages of Product Development



The most significant benefit of product development is having a limited-edition selection for the retail store. Because the range is not accessible in any other store, it allows the merchant to promote the collection's exclusivity.

The most significant disadvantage of producing a new product is the high cost of resources required. The most significant expense is the formation of a design and development (R&D) team. They're also given unique equipment and materials to help them in their experiments.

The exclusive collection distinguishes the range from that of the other stores. Customers that are looking for a variety of products from the masses become devoted customers.

The time it takes to create a new collection ranges from three to twelve months. For example, the design development team for the ladies collection spends at least six months developing a season's collection.

The collection's exclusivity aids the store in establishing a brand identity. Sheetal or Roopam stores, for example, are known for offering a diverse and exclusive assortment of products to its female consumers.

In order to make up for the batch size, the merchant must create a specified minimum number of items of the same pattern or style for exclusive designs. Otherwise, the processes in question will be unable to run. The expense of employing the aforementioned procedure could become prohibitively expensive. As a result, the product's pricing is out of reach for its intended audience.

The store can charge prices that are incomparable to other products in the same category due to the range's exclusivity and product distinction. This allows the merchant to cover its margins due to the collection's exclusivity, which results in a lengthier stock turnaround time.

The shop may need to use its own manufacturing plant to create a unique design or collection. This makes it easier to keep the procedures hidden from competitors or suppliers. As a result, the cost of producing the exclusive line has increased.

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