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17 Sample Markup Problems Ted Mitchell #1 Cost of Product as Percent of Price (revenue per unit) • You have purchased an apple for V = $2 and have a selling price P= $5 per apple. • What is the cost of the apple as a percent of the selling price? • Answer; • Cost as Percent of price = V/P = 2/5 = 40% #2 Selling price (revenue per unit) as Percent of Cost • You have purchased an apple for V = $2 and have a selling price P= $5 per apple. • What is the selling price of the apple to the cost of the apple? • Answer • Cost as Percent of price = P/V = 5/2 = 250% 3 Markup Problem • A boy buys an apple for V = $2 and sells it for P = $5. What is his dollar markup or unit contribution (M) to Fixed costs and Profits? • P-V=M • $5 - $2 = M • $3 = M = Unit per Unit Sold 4 Markup Problem • A boy buys an apple for V = $2 and sells it for P = $5. What is his Markup on Price (Mp)? • (P - V) / P = Mp • ($5 - $2) / $5 = Mp • $3/$5 = 0.6 = 60% =Mp 5 Discount Off List • A store pays an apple distributor V = $2 per dollars per apple and sells it the suggested list price P = $5. What is the store’s Discount Off List or Markup (Mp)? • (P - V) / P = Mp • ($5 - $2) / $5 = Mp • $3/$5 = 0.6 = 60% = Discount off list price 6 Commission Rate A store gives their salesmen a 60% commission on the sale of an apple. The selling price is $5 per apple and the cost of each apple to the store is $2. How many dollars does the salesperson earn every time he sells an apple? • (P - V) / P = Mp • ($5 - $2) / $5 = 60% commission • Salesmen’s profit = P x Mp = $5 x 60% = $3 7 Discount Off List to Cost • An apple distributor gives a store a 60% discount off the suggested list price of P = $5 per apple (i.e., Mp = 60%). What is the store’s cost per apple (V)? • • • • (P - V) / P = Mp (5 - V) / 5 = 0.6 5 - V = 0.6(5) = 2 2=V or the cost per apple = $2 8 Given Markup on Price and Cost • A boy buys an apple for V = $2 and sells it with a markup on price of 60% (i.e., Mp = 60%). What is the selling price of the apple? • • • • • (P - V) / P = Mp (P - 2) / P= 0.6 P - 2 = 0.6P P -0.6P = 2 P = 2/.4 = 5 or the price per apple = $5 Many students simply memorize • Cost based pricing equation to set a selling price using markup and variable cost is • Price = (variable cost per unit)/(1-Mp) • P = V/(1 - Mp) • P = $2/(1-60%) • P = $2/(1-0.6) • P = $2/0.4 = $5 9 Markup on Cost • A boy buys an apple for V = $2 and sells it for P = $5. What is the Markup on Cost (Mv)? • (P - V) / V = Mv • (5 - 2) / 2= Mv • 3/2 = 1.50 = 150% = Mv • Markup on cost = Mv = 150% 10 Convert Markup on Cost to Markup on Price • You are told that a product has a markup on cost of 25% What is the product’s markup on price? • (1/Mp) - (1/Mv) = 1 • 1/Mp – 1/0.25 = 1 • 1/Mp = 1 + 1/0.25 • 1/Mp = 1 + 4 = 5 • Mp = 1/5 = 0.20 or 20% 11 Convert Markup on Cost to Markup on Price • You are told that a product has a markup on cost of 25% What is the product’s markup on price? • Make 25% into a fraction • Mp = 25% = 25/100 • “add the top part to the bottom part” 25/(25+100) • And solve for Mp = 25/125 • Mp = 25/125 = 0.20 or 20% 12 Chain Markdowns & Markups • You marked down your selling price of $10 in the store by 10% two weeks ago, followed by a 20% markdown last week. This week you marked the price up by 15%. What is your current price? • Current price = $10 x (1 - markdown #1) x (1 - markdown #2) x (1 + markup) • Current price = $10 x (1-10%) x (1-20%) x (1+15%) • Current price = $10 x 0.9 x 0.8 x 1.15 = $8.28 13 Chain Markdowns & Markups • You marked down your original selling price of $10 in the store by 10% two weeks ago, followed by a 20% markdown last week. What is the size of the total percentage markdown or discount over the two events? • Current price = $10 x (1-markdown #1) x (1-markdown #2) • Current price = $10 x (1-10%) x (1-20%) • Current price = $10 x 0.9 x 0.8 = $7.20 • Total Markdown % = (Current price – Original Price)/(Original price) • Total Markdown = ($10 -7.20)/$10 = -$2.80/$10 • Total Markdown or Discount = -2.80/10 = -0.28 or -28% 14 Chain Markdowns & Markups • You marked down your original selling price of $10 in the store by 10% two weeks ago, followed by a 20% markdown last week. What is the size of the total percentage markdown or discount? • To solve directly • Total discount = Discount 1 + Discount 2 + (Discount 1 x Discount 2) • Total discount = D1 + D2 + (D1 x D2) • Total discount = (-0.10) + (-0.20) + (-0.10 x -0.20) • Total discount = -0.30 + 0.02 = -0.28 or -28% 15 Markups in a Channel of Distribution • A retailer sells wagons at a list price $800 each and receives a 40% markup on price. • His distributor gets a 20% markup on the price he sells the wagon for to the retailer • The manufacturer get a 30% markup on the price he sells the wagon for to the distributor • What is the dollar cost that the manufacturer pays to make each wagon? • Manufacturer’s cost to make each wagon= $800 x (1-0.4) x (1-0.2) x (1-0.3) = $268.80 16 More Markups in a channel of distribution • The manufacturer builds wagons for $228.80 each and sells them to a distributor with a markup on price of 60%. • The distributor sells the wagons to a retailer. • The retailer sells the wagons to the final consumer for $800 each and receives a 30% discount off the $800 suggested retail price. • What dollar profit does the distributor make on each sale? 17 Markups in a Channel of Distribution • A retailer sells wagons at a list price $800 each and receives a 40% markup on price. Pays the distributor 0.6 of $800 = $480 • His distributor gets a 20% markup on the price he sells the wagon for to the retailer The distributor keeps 20% of the price he’s paid 0.2 x $480 = $96 and pays the manufacturer $480 – $96 = $384 • The manufacturer get a 30% markup on the price he sells the wagon for to the distributor • What is the dollar profit that the manufacturer makes on the sale of each wagon? • Manufacturer’s profit per sale is 30% of the $384 price he is paid 0.3 x $384 = $115.20 His cost per wagon = $384 -$115.20 = $268.80 • Markup problems are simple but you have think about them carefully • If you rush, you can get them wrong. • Any Questions on Markup?