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Short Review of Channel Markup Ted Mitchell

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Markup in a Channel of Distribution Manufacturer Distributor Retailer Final Consumer pays the listed retail price recommended by the Manufacturer

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Markup on TOP of the Cost Compared to Markup on TOP of the Price Markup on Price Mp = (P-V)/P Markup on Cost Mv = (P-V)/V Mp = ———— (P-V) P Mv = ———— (P-V) V

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Problem #1 A retailer charges his customer the manufacturer’s suggest list price of $120 per widget. His Discount Off Suggested List Price or Markup on Price is 40%. What did it cost him to buy the widget from the Distributor? What is the definition of markup on price, Mp? Mp = (P-V)/P 40% = ($120 –V)/$120 40%($120) – $120 = -V $48 - $120 = -V V = $120 – $48 = $72

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Problem #1 A retailer charges his customer the manufacturer’s suggest list price of $120 per widget. His Discount Off Suggested List Price or Markup on Price is 40%. What did it cost him to buy the widget from the Distributor? What is the definition of markup on price, Mp? Mp = (P-V)/P 40% = ($120 –V)/$120 40%($120) – $120 = -V $48 - $120 = -V V = $120 – $48 = $72 What was the selling price the distributor charged the retailer?

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Problem #2 A retailer charges his final customer $120 per widget. His Markup on Cost is 66.67%. What did it cost him to buy the widget from the Distributor? What is the definition of markup on cost, Mv? Mv = (P-V)/V 66.67% = ($120 –V)/V 66.67%V = $120 – V 66.67%V + V = $120 V (0.6676 + 1) = $120 V = $120/1.6667 = $71.99 = $72

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Problem #3 A retailer charges a selling price that earns him a fair and normal profit with a Markup on Cost is 66.67%. What is the Markup on Price? To Convert Mv to Mp Mv = 66.67/100 Add the top part to the bottom part to calculate the markup on price Mp = 66.67/166.67 = 0.40 = 40%

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Problem #4 A manufacturer makes a product that costs $21 per unit and sells it to a distributor. The manufacturer charges a selling price that earns him a fair and normal profit using a Markup on Price of 30%. What is the Selling Price to the Distributor? What is the definition of markup on price? Mp = (P-V)/P 30% = (P-$21)/P 30%P = P-$21 30%P – P = -$21 P(0.30-1) = -$21 P = -$21/-0.70 = $30

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Problem #4 A manufacturer makes a product that costs $21 per unit. The manufacturer charges his distributor a selling price that earns him a fair and normal profit using a Markup on Price of 30%. What is the his Selling Price to the Distributor? What is the definition of markup on price? Mp = (P-V)/P 30% = (P-$21)/P 30%P = P-$21 30%P – P = -$21 P(0.30-1) = -$21 P = -$21/-0.70 = $30 What is the cost per unit to the distributor?

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Problem #5 A Distributor Buy a widget for $30 and sells to a retailer for the wholesale price of $72. What is the Distributor’s dollar markup? Dollar markup = P-V Dollar markup = $72 - $30 = $42

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Problem #6 A manufacturer builds a product for a variable cost of $20 each. The manufacturer sells the product with a fair and normal 50% markup on price to a Distributor. The distributor sells the product to a retailer. The Retailer sells the product to the final consumer at a selling price of $120 earns a 40% markup on price. What is the Distributor’s dollar markup? Dollar markup = Price to the retailer – cost from the manufacturer Dollar markup = P-V Dollar markup = $72 - $30 = $42

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Markup is Like a Sales Commission If you sell something for a $100 and you get a sales commission of 60%. How many dollars in commission do you earn?

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The customer pays you $100 and you make 60% commission, then how much do you have to pay the company? Price,P = $100 Your Dollar profit, M = $60 Your cost from the company P- M = V V = $100 - $60 = $40 Your commission rate = (P-V)/P = Mp (P-V)/P= (100-60)/100 =60/100 = 60%

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You are an independent sales person who works with several different firms as a manufacturer’s agent selling their products to your customers. One of you manufacturers has offered you the opportunity to sell a new pump to your customers. The manufacturer will bill you for $180 for every pump you sell and will ship the pump directly to your customer. You need a 40% sales commission on this type of product to stay in business. You must set the selling price that the customer will pay you for the pump. What selling price must you set for the pump if you must make a 40% commission on the selling price?

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(P-V)/P = Commission = Markup = Mp P-V = Mp(P) Substitute what we know P - $180 = 40%P P – 0.40P = $180 (1 – 0.40)P = $180 0.60P = $180 P = $180/0.60 = $300 is your selling price V = $180 Your commission = 300-180 = $120

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Any Questions?

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