Chapter 27 Pricing Math 1 Marketing Essentials Chapter 27 Pricing Math Section 27.1 Calculating Prices

Chapter 27 Pricing Math 1

Marketing EssentialsMarketing Essentials Chapter 27 Pricing Math

Section 27.1 Calculating Prices


SECTION 27.1SECTION 27.1

What You'll LearnWhat You'll Learn

Calculating PricesCalculating Prices

How a firm's net profit or loss is related to pricing

How to calculate dollar and percentage markup based on cost or retail

How to calculate markdown in dollars, and how to determine sale price and maintained markup


SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices

Why It's ImportantWhy It's Important

Now 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.



Key TermsKey Terms

gross profit

maintained 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.

Profit vs. Markup



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)



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 smaller

future markdowns are calculated on retail

profits are calculated on sales revenue



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.

Markup Equivalents Table



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($) = RP

Cost Method of Pricing

Slide 1 of 2



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($) = RP

Cost Method of Pricing

Slide 2 of 2



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?

Typical Markup Percentage

Product Category Typical Markup Percentage Based on Cost

Small Appliances (microwave, coffee maker)

Large Appliances (refrigerator, dryer)

Automobiles

Automobile Accessories (sunroof, CD player)

Clothing

30%

15%-20%

5-10%* (*note dealers make money on factor incentives and sale of accessories)

15-20%

100%



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(%) = RP

Calculate the dollar markup:

RP - C = MU($)

Retail Method of Pricing



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?

The Retail Box

$ % $ %

Retail Price M J Retail Price M J100 11.25 100

Markup N K Markup N K4.50 40

Cost O L Cost O L6.75 6.0



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($) = SP

Calculations for Lowering Prices

Slide 1 of 2



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($)

Calculations for Lowering Prices

Slide 2 of 2



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($) continued

Maintained Markup

Slide 1 of 2



Subtract 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(%)

Maintained Markup

continued

Slide 2 of 2


27.1 ASSESSMENTASSESSMENT

Reviewing 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 $279.99 (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.


27.1 ASSESSMENTASSESSMENT

Thinking Critically

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.


Marketing EssentialsMarketing Essentials

End of Section 27.1

Documents

Chapter 27 Pricing Math 1 Marketing Essentials Chapter 27 Pricing Math Section 27.1 Calculating Prices