Presentation on theme: "Confusion in the words Markup on price, Markup on cost, Mark-on Ted Mitchell."— Presentation transcript:
Confusion in the words Markup on price, Markup on cost, Mark-on Ted Mitchell
Remember The differences between 1) the proportion of the final price to the original price, %p = F/P %p is read as the percent of the value P 2) a percentage change from the original amount of the price, %∆p = ∆p/P = (F-P)/P ∆p is read as the size of the change from the value P %∆p is read as the percent change from the value P The relationship is F/P = (F-P)/P This become more important when the difference is between a cost and a price … THE Profit
A simple increase in the size of the price tag From the current or original price, P, to the new higher price, F F–P = ∆p A Mark-on is the percentage increase in the size of the new price, F, from the old price tag, P Percentage Mark-on = (F-P)/P = ∆p/P = %∆P As a Two-Factor Price Changing machine F = %∆p x P
Mark-on is the opposite of a markdown Markdowns are discount percentages Mark-ons are price increase percentages a 10% markdown, a 20% markdown, a 25% mark-on (Why NOT Markup?) Retailers will often call it a ‘markup’ Accountants reserve the word ‘markup’ for the difference between the cost of the good sold and the price it is sold for!
Markups Dollar Markup is a measure of the profit per unit sold (unit profit) Dollar Markup from Cost = Selling Price, P-Cost, V Dollar Markup from Cost = P–V = ∆v The percentage markup comes in two flavors 1) Dollar markup as a percentage of the cost (P-V)/V = ∆v/V = %∆v = Mv 2) Dollar markup as a percentage of selling price (P-V)/P = ∆v/P = Mp
%Markup on Cost Dollar markup as a percentage of the cost (P-V)/V = ∆v/V = %∆v = Mv Retailer: perfectly consistent with a percentage on the price we paid for it and the price we sell it for It reflects the rate of return on our inventory investment What accountants call ‘markup on price’ we call ‘discount off suggested list price’
%Markup on Cost Dollar markup as a percentage of the cost (P-V)/V = ∆v/V = %∆v = Mv NOT as useful or as widely used as Markup on Price When you hear the words ‘percentage markup’ always assume it is markup on price Only use as markup on cost when it is explicit
%Markup on Selling Price Dollar markup (unit profit) as a percentage of the selling price (P-V)/P = ∆v/P = Mp Accountant: Profit is Revenue –Costs and is normally positive perfectly consistent with the accounting machine in which price (p = average revenue per unit sold) is an Input and cost is the output, V, and V/P is the conversion rate (V-P)/P it is just awkward to report profit as a negative number so accountants use (P–V) Confusing yes, but better than awkward!?
%Markup on Price, Mp Is the most widely used ratio in business It is extremely useful But it is perpetually confusing to students of business because as it is a percentage change that has had its sign reversed Think of it as the rate or the efficiency at which the price tag, P, is converted into unit profit Unit Profit, U = (P–V)/P x Selling price, P Profit on a Unit Sold = Markup on price x Price P–V = Mp X P
Do Not Confuse A percentage mark-on is a percentage increase on the current price Mark-on = (F-P)/P A percentage markup on cost is a percentage increase on the cost of the inventory Markup on cost, Mv = (P-V)/V A percentage markup on price is the unit profit as percentage of the selling price Markup on price, Mp = (P-V)/P
Any Questions On the nature of Mark-on (a percentage increase on a price, %∆p) Markup on cost, Mv (a percentage increase on a cost, %∆v) Markup on price, Mp (unit profit as a percent of the selling price, %p)