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Remember the Markup on Price. Mp aka Gross Profit Margin aka Return on a Dollar of Sales aka P-V Ratio Ted Mitchell

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Definitions of Mp are If I ask you for a definition of the Markup on Price What do you remember as the equation?

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Definitions of Markup on Price, Mp, are Mp = (P-V)/P where dollar profit/unit = P-V Mp = 1-(V/P) Mp = Mv/(1-Mv) Mp = G/R where G = Mp(R) Mp = ((P-V)Q)/P(Q) where Mp = (P-V)/P Where G = gross profit. R= sales revenue, VQ = COGS = cost of goods sold, P= selling price per unit sold, Q= quantity sold, V=variable cost per unit,

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How do we use Mp? 1) For Predicting the gross profit, G, with a forecasted revenue, R*, knowing the normal and expected Markup on Price, Mp G = Mp x R* 2) Calculating the selling price, P, knowing the normal and expected variable cost per unit, the normal and fair, Mp, P = V/(1 – Mp)

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How do we interpret Mp? Mp is a measure of the average rate of efficiency or effectiveness of the marketing department converting Revenue into the Gross Profit In Setting the selling price, Mp, is the Profit Returned by a dollar of sales and it is a popular way to rate the desirability of the market

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The Roots of Mp are 1) It is a cost-based method for Setting the selling based on the equation for Gross Profit G = P(Q) – V(Q) P = V + G/Q 2) Breakeven Price, BEP, is where G = 0 BEP = V 3) Setting the selling price, P, by defining the gross profit it must bring in G = Mp x R P = V + Mp(R)/Q where R = P(Q) P = V/(1 – Mp)

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The Virtues are 1) Simple for retailer’s to calculate 2) Fair: passes cost increases in variable costs (COGS) to the customer 3) Basis for Industry stability given similar cost structures 4) Guarantees a profit in normal, fair and expected times

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The Weaknesses of Mp are 1) assumes that forecasted revenue, R*, is independent of the chosen selling price. 2) it is not fair in that it leads to passing a additional percentage of the costs to the customer for covering normal, fair and expected profit. 3) it leads to implicit price collusion

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Remember the Markup on Price, Mp?

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