Managers and analysts closely follow gross profi ts.

A small
change in the gross profi t rate can signifi cantly affect the bottom
line. For example, at one time, Apple Computer (USA)
suffered a textbook case of shrinking gross profi ts. In response
to pricing wars in the personal computer market, Apple
had to quickly reduce the price of its signature Macintosh
computers—reducing prices more quickly than it could reduce
its costs. As a result, its gross profi t rate fell from 44 percent in
1992 to 40 percent in 1993. Though the drop of 4 percent seems
small, its impact on the bottom line caused Apple’s share price
to drop from $57 per share to $27.50 in just six weeks.
As another example, Debenham (GBR), the second largest
department store in the United Kingdom, experienced a
14 percentage share price decline. The cause? Markdowns on
slow-moving inventory reduced its gross margin.
On the positive side, an increase in the gross profi t rate
provides a positive signal to the market. For example, just a
1 percent boost in Dr. Pepper’s (USA) gross profi t rate
cheered the market