America’s Biggest Rip Offs Are there any items that you buy or that you can think of that seem really inexpensive to make but priced very high? What are your thoughts on what products have the biggest markup today? ◦

Movie theater popcorn - 900% markup A medium bag of popcorn retails for $6. What do you think it costs to make? ◦ costs just 60 cents to make but ◦ a whopping 900% markup.

College Textbooks The average estimated cost of books and supplies in a given college year is $900 ◦ Many students report paying far more ◦ Many textbooks are never or seldom used

Name-brand painkillers - 60% markup A 50-count bottle of 200 mg Advil tablets costs $8.49. ◦ The generic bottle sells for $5.29 for the exact same bottle of generic ibuprofen ◦ Law requires all generic drugs to be just as effective (and even use the exact same active ingredients) as the branded drugs they are modeled after

Hotel mini-bars - 1,300% markup The chocolate bars and sodas in a hotel mini-bar can look alluring. But you'll rack up a huge bill if you open up that fridge. ◦ Gummy Bears for $14, anyone? Hotel in-room movies - 200% markup $10-$15 based on how new and popular the movie

Why Use Markup? Why the markup? ◦ Cover businesses operating expenses ◦ Cover Taxes ◦ Make a profit

Overhead Expenses The markup on the products that you sell must cover your overhead or operating expenses ◦ Overhead expenses include wages and salaries of employees, rent, utility charges, and taxes, Supplies, advertising, miscellaneous expense  Also known as Operating Expenses

Overhead Expenses Formula: Retail price * Overhead Percentage ◦ Overhead is an estimated percentage of retail price ◦ Same as your overhead expenses for gross sales If your total overhead expenses are 40% of gross sales, w hat % of your retail price on each item would be overhead? ◦ 40% (use the same as for gross sales)

Example: Overhead Your total overhead expenses are 15% of total gross sales of $1 million dollars. If you have an item that costs $1000 and sells for $1333: ◦ What is your overhead percentage?  15% ◦ What is the overhead amount on that one item?  $1333 X.15 = ◦ What is the Markup amount on this item?  $1333 – 1000 = $333 $199.95

Overhead Expenses Net Profit/Loss = subtracting your overhead expenses from your revenue (markup) Profit: you made more money than you spent ◦ When your Markup > Overhead expense Loss: You spent more than you made ◦ If Markup < Overhead expense Example: Do we have Net Profit or Net Loss? ◦ Markup = $333 and Overhead = $ ◦ What is the amount of our Net Profit? Net Profit

Formula for Net Profit Three Step Formula: Markup = Retail Price – Cost Overhead = Overhead % * Retail Price Net Profit = Markup – Overhead

Your total overhead expenses are 15% of total gross sales of $1 million dollars. If you have an item that costs $1000 and sells for $1333: What is your net profit? Markup = = $333 Overhead = 1333 X.15 = $ Net Profit = $333 - $ = $133.05

Examples Retail price is $140. Cost is $56. Overhead is 50% of retail price. Find the markup, overhead, and net profit. Markup = Retail Price – Cost Markup = $140-$56 ◦ Markup = $84 Overhead = Overhead Percent * Retail Price 50% of retail price ◦ Overhead =.50 * $140 ◦ Overhead = $70 ◦ $70 is spent to cover any expense the business incurs Net Profit/Loss = Markup – Overhead Net Profit = $84 – $70 ◦ Net Profit = $14.00

Example Bob’s Sport Shop purchases 15-foot rowboats for $44.98 each. Bob sells the boats for $89.99 each. Bob estimates his overhead expenses to be 40% of the retail price of his merchandise. What is the net profit on each 15-foot rowboat?

Answer to Example Markup = Retail Price – Cost Markup = – Markup = $45.01 Overhead = Overhead Percent * Retail Price 40% of retail price Overhead =.40 * Overhead = Overhead = $36.00 $36 is spent to cover any expense the business incurs Net Profit = Markup – Overhead Net Profit = Net Profit = $9.01

Calculate Cost Based on Retail Price You may need to decide your product’s cost based on the retail price ◦ Add a new product that your competitors sell and sell it for less, still making a profit Formula: Retail Price * (1 – Markup Rate) = Cost

Calculate Cost Based on Retail Price Ex: Your competition sells their bag for $95. You want to sell one for $90 to be competitive but still maintain a 40% markup Formula: Retail Price * (1 – Markup Rate) = Cost What % is considered cost? (1 –.40 =.60) or 60%

Cost Based on Retail Price Ex: Your competition sells their bag for $95. You want to sell one for $90 to be competitive but still maintain a 40% Markup. What is the cost you can pay to meet this goal? Retail Price * (1 – Markup Rate) = Cost $90 X (1-.40) = $54 is your expected cost  Or ◦ $90 X.60 = $54

Cost based on Retail Price Your competitor sells sweatshirts for $65. You want to sell yours for $60 to be competitive but still maintain a 38%. markup What is the cost you can pay to meet this goal? ◦ Cost % = ◦ Cost = x = ◦ The company Design Shirts sells you shirts for $30. and Retail Shirts sells them to you for $39. ◦ Which could you afford and still make a profit?

Sales Tax Sales Tax: additional amount added to the retail price of a product(s) is collected by retailers and paid to state governments Formula: Sales tax percentage * Retail price Retail price + Sales Tax = gross sale What is the sales tax in our city? ◦ 7%

Sales Tax Example Example 1: Purchases total $78.50 with Sales Tax 7% ◦ What is the sales Tax $?  Sales Tax = *.07 = 5.50 ◦ What is the Gross Sale or Total Due?  Gross Sale: = $84.00 Example 2: Purchases total $86.50 with Sales Tax 7%  Sales Tax = $86.50 *.07 = 6.06  Gross Sale: $ = $92.56

Short Cut Example Purchases total $78.50 with a sales tax rate of 7% Completed in one Step: ◦ * 1.07 = 84.00

Now lets practice on your own Making Sense of Markups Worksheet