2 Calculating Prices SECTION 27.1 What You'll LearnHow a firm's net profit or loss is related to pricingHow to calculate dollar and percentage markup based on cost or retailHow to calculate markdown in dollars, and how to determine sale price and maintained markup
3 Calculating Prices SECTION 27.1 Why It's ImportantNow that you understand the principles of pricing, it is time to learn how to calculate prices. Wholesalers and retailers, as well as manufacturers and service businesses, need to perform mathematical calculations to determine the prices they will charge their customers.You learned earlier that pricing is related to a company's profitability; now you will learn how they are related.
5 Calculating Prices SECTION 27.1 Profit vs. Markup A business’s profit is not the same as its markup. Markup is the difference between the cost of an item and the retail price. Profit is what’s left over after all other expenses have been paid.
6 Calculating Prices SECTION 27.1 Basic Markup Calculations Retailers and wholesalers use the same formulas to calculate markup. The most basic pricing formula is the one for calculating retail price:Cost (C) + markup (MU) = retail price (RP)Two other formulas can be derived from this formula:Retail price (RP) – markup (MU) = cost (C)Retail price (RP) – cost (C) = markup (MU)
7 Calculating Prices SECTION 27.1 Percentage Markup In most business situations, the markup figure is expressed as a percentage MU(%), rather than a dollar figure MU($).Most sellers compute markup based on retail price rather than cost because:the markup on retail sounds smallerfuture markdowns are calculated on retailprofits are calculated on sales revenue
8 Calculating Prices SECTION 27.1 Markup Equivalents Table The markup equivalents table lists markup percentages based on retail and the equivalent percentages based on cost. To use the table, you locate the percentage markup on retail and read its markup on cost equivalent in the adjacent column or vice versa. The table allows users to quickly convert markups on retail to markups on cost and vice versa.
9 Calculating Prices SECTION 27.1 Cost Method of Pricing Sometimes marketers know only the cost of an item and its markup on cost. In such a situation, they use the cost method of pricing:Multiply the cost by the percentage markup on cost in decimal form:C x MU(%) = MU($)Add the dollar markup to the cost to get the retail price:C + MU($) = RPSlide 1 of 2
10 Calculating Prices SECTION 27.1 Cost Method of Pricing If you know the cost and the markup on retail, use the markup equivalents table to convert markup on retail to markup on cost, then calculate, using the cost method of pricing:Multiply the cost by the percentage markup on cost in decimal form:C x MU(%) = MU($)Add the dollar markup to the cost to get the retail price:C + MU($) = RPSlide 2 of 2
11 Calculating Prices SECTION 27.1 Typical Markup Percentage Product CategoryTypical Markup Percentage Based on CostSmall Appliances (microwave, coffee maker)Large Appliances (refrigerator, dryer)AutomobilesAutomobile Accessories (sunroof, CD player)Clothing30%15%-20%5-10%* (*note dealers make money on factor incentives and sale of accessories)15-20%100%Markup percentages vary with the type of product and business. How would you determine how much a microwave, whose retail price was $159.99, cost when all you knew was the markup percentage based on cost noted in the above table? What would be its cost in dollars?
12 Calculating Prices SECTION 27.1 Retail Method of Pricing If you know only the cost and markup on retail, you can use the retail method of pricing to compute the retail price.Determine what percentage of the retail price is the cost:RP(%) - MU(%) = C(%) (retail price would be 100%)Determine the retail price by dividing the cost by the decimal equivalent of the cost percentage:C($) / C(%) = RPCalculate the dollar markup:RP - C = MU($)
13 Calculating Prices SECTION 27.1 The Retail Box To compute retail price using the retail method, fill in the boxes following the letter sequence (J-O). Note that the box labeled “J” (RP%) is always 100%. The amounts that go in the boxes labeled K (MU%) and O (C$) are usually known. Why is this retail box an example of the retail method for calculating markup?$ % $ %Retail Price M J Retail Price M JMarkup N K Markup N KCost O L Cost O L
14 Calculating Prices SECTION 27.1 Calculations for Lowering Prices When a business lowers its prices, a new sale price must be calculated, as well as a new markup. To calculate a markdown, determine the markdown percentage on retail. Then:Determine the dollar markdown by multiplying the retail price by the percentage markdown:RP x MD(%) = MD($)Subtract the dollar markdown from the retail price to get the sale price:RP - MD($) = SPSlide 1 of 2
15 Calculating Prices SECTION 27.1 Calculations for Lowering Prices There is another, simpler way to calculate the sale price:Subtract the markdown percentage from 100% (representing retail price):RP(%) - MD(%) = SP (%) (RP = 100%)Multiply the retail price by the decimal equivalent of the percentage sale price:RP x SP(%) = SP($)Slide 2 of 2
16 Calculating Prices SECTION 27.1 Maintained Markup When a marketer marks down goods, the markup and markup percentage change. The difference between an item's final sale price, and its cost is called the maintained markup.To determine the maintained markup:Calculate the new sale price:RP(%) - MD(%) = SP (%)RP x SP(%) = SP($) continuedSlide 1 of 2
17 Calculating Prices SECTION 27.1 Maintained Markup continuedSubtract the cost from the sale price to determine maintained markup (MM($)):SP - C = MM($)Divide the maintained markup in dollars by the sale price to determine the maintained percentage:MM($) / SP = MM(%)Slide 2 of 2
18 Reviewing Key Terms and Concepts ASSESSMENT27.1Reviewing Key Terms and Concepts1. Explain how a firm's net profit or loss is related to pricing.2. How are the dollar and percentage markups based on cost and based on retail calculated? Illustrate the formulas for a book that costs $13.99 and has a retail price is $19.99.3. Assume that an item that cost $125 and currently retails for $ (RP) is going to be marked down 40 percent for a special sale. Calculate the new sale price, as well as the maintained markup in dollars and as a percent.
19 ASSESSMENT Thinking Critically 27.1 If a buyer wanted to buy goods that cost $100 and the customary markup on retail was 40 percent, what two methods could the buyer use to calculate the retail price? Explain.
20 Calculating Discounts SECTION 27.2Calculating DiscountsWhat You'll LearnThe general procedure for figuring discountsHow to calculate various kinds of discounts
21 Calculating Discounts SECTION 27.2Calculating DiscountsWhy It's ImportantDiscounts affect the final price a customer will pay. Therefore, it is essential that you learn how to calculate discounts and the net price payable.
23 Calculating Discounts SECTION 27.2Calculating DiscountsDiscountsA discount is a reduction in the price of goods and services sold to customers. Calculating discounts involves two steps:Multiply the price (P) by the discount percentage [D(%)] to get the dollar amount of the discount [D($)]:P X D(%) = D($)Subtract the discount from the price to get the net price (NP), or the amount that the customer will actually pay:P – D($) = NP
24 Calculating Discounts SECTION 27.2Calculating DiscountsEmployee DiscountsBusinesses offer employee discounts to encourage workers to buy the products they sell or manufacture. Employees who buy and use their company's products project confidence in and enthusiasm about them. Employee discounts can range from 10 to 30 percent for entry-level employees and as high as 50 percent for top-level executives.
25 Calculating Discounts SECTION 27.2Calculating DiscountsDiscounts from Manufacturers and DistributorsSome common types of discounts offered by manufacturers and distributors are:cashtradequantityseasonalpromotional discounts
26 Calculating Discounts SECTION 27.2Calculating DiscountsCash DiscountsA cash discount is a discount offered to buyers to encourage them to pay their bills quickly. With the invoice terms 3/15, net 60, the first number (3) represents the percentage of the discount applicable to the invoice total (P).Slide 1 of 2
27 Calculating Discounts SECTION 27.2Calculating DiscountsCash DiscountsTo calculate the cash discount:Determine the dollar discount:P x D(%) = D($)Determine the net price:P - D($) = NPTo determine a cash discount on a unit price, do the same calculation, with P equaling the unit price.Slide 2 of 2
28 Calculating Discounts SECTION 27.2Calculating DiscountsTrade DiscountsTrade discounts are based on manufacturers' list prices. They are calculated in the same way as cash discounts:Determine the dollar discount:P x D(%) = D($)Determine the net price:P - D ($) = NP
29 Calculating Discounts SECTION 27.2Calculating DiscountsQuantity DiscountQuantity discounts are offered to buyers for placing large orders. Quantity discounts may be quoted as either a percentage of price or as part of a quantity price list.Slide 1 of 2
30 Calculating Discounts SECTION 27.2Calculating DiscountsQuantity DiscountUsing a quantity price list:No. of itemsUnit price $ $ $.85If you purchased 50 items, you would pay $.85 each. Your total bill would be $42.50 ($.85 X 50).A cumulative discount is quoted as a percentage and is calculated like a cash discount.Slide 2 of 2
31 Calculating Discounts SECTION 27.2Calculating DiscountsPromotional DiscountsPromotional discounts are given to businesses that agree to advertise or promote a manufacturer's products. When the promotional discount is quoted as a percentage, it is calculated the same way as a cash discount. If a dollar discount is given, calculate the discount percentage this way:Divide the dollar discount by the original price of the order:D($) / P = D(%)
32 Calculating Discounts SECTION 27.2Calculating DiscountsSeasonal DiscountsSellers offer seasonal discounts to encourage buyers to purchase goods long before the actual consumer buying season. To calculate the net price with a seasonal discount offered as a percent:Determine the dollar discount:P x D(%) = D($)Determine the net price:P - D($) = NP
33 Reviewing Key Terms and Concepts ASSESSMENT27.2Reviewing Key Terms and Concepts1. What procedures are used to calculate the dollar amount of a discount and the final selling price?2. Carlo's Ice Cream Specialties gives all of its employees a 15 percent discount on ice cream cakes. What would an employee pay for a chocolate ice cream cake that is $13.75?
34 ASSESSMENT Thinking Critically 27.2Thinking CriticallyAssume you are given a trade discount of 30 percent and a seasonal discount of 10 percent. You also take advantage of a cash discount of 2 percent. Would you be entitled to a 42 percent discount? Explain.
35 Promotional Discounts 27.2Graphic OrganizerDiscounts from Manufacturers and DistributorsDiscounts fromManufacturers and DistributorsCash DiscountsTrade DiscountsQuantity DiscountsPromotional DiscountsSeasonal Discounts