Supplier Contribution to Profit Calculation and Supplier’s Expense Levels

Abstract

Suppliers of goods present a very important cost object for trading companiessuch as retail. There is, however, no theoretical explanation as to how to calculate a contribution to profits generated from an individual supplier. This calculation is the subject of the paper. There is no calculation that shows how goods, provided from the supplier, create profit through gross margin and how the supplier`s behavior influences the costs (like delivery terms, costs of keeping specific goods fresh…). The final costs further decrease the profit generated by suppliers. As they have long found it illogical to calculate contribution to profit from suppliers in a production company, trading companies have long ignored it, as well. The Activity Based Costing (ABC), as the up-to-date system, still does not possess the cost hierarchy for suppliers as the cost object. The aim of the paper is to present a proposal for creating the cost hierarchy for suppliers in a trade company through creating a theoretical financial model as a method. The model also offers a theoretical explanation of how to calculate the contribution from a supplier or a group of suppliers. It is based on empirically evident activities in any supermarket or hypermarket, which makes it possible to create explanatory theoretical research.