Why Businesses Use Markup? Why the markup? ◦ Cover businesses operating expenses ◦ Cover Business 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)

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 $1500: What is your overhead percentage?  15% ◦ What is the overhead amount on that one item?  $1500 X.15 = $225

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? ◦ What is your markup?  1500 – 1000 = 500 ◦ Net Profit/Loss = $500 - Overhead = $ ◦ What is the amount of our Net Profit/Loss?  $275 Net Profit

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

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

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

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? ◦ 7.5%

Sales Tax Example Example 1: Purchases total $78.50 with Sales Tax 7.5% ◦ What is the sales Tax $?  Sales Tax = *.075 = 5.89 ◦ What is the Gross Sale or Total Due?  Gross Sale: = $84.39 Example 2: Purchases total $86.50 with Sales Tax 7.5%  Sales Tax = $86.50 *.075 = 6.49  Gross Sale: $ = $92.99

Short Cut Example Purchases total $86.50 with a sales tax rate of 7.5% Completed in one Step: ◦ * = 92.99

Now lets practice on your own Making Sense of Markups Worksheet