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Pricing Math
Chapter 27
Basic Pricing Concepts
• Markup pricing: the difference between the price of an item and its cost that is generally expressed as a percentage. – Markups on products must be high enough to cover expenses and
included intended profit
• Cost-plus pricing: all costs and expenses are calculated, and then the desired profit is added to arrive at a price.
• Demand-oriented pricing: determine what consumers are willing to pay for given goods and services.
Profit vs. Markup
• Profit is the amount left from revenue after the costs of the merchandise
• Markup is similar to gross profit– Gross profit: difference between sales revenue
and the cost of goods sold.
• A business must have a markup high enough to cover expenses and provide the profit to be successful.
Basic Markup Calculations
• Same formulas to calculate markups in every industry:Cost (C) + Markup (M) = Retail Price (RP)
• Two other formulas can be derived from this basic formula – cost and markup:Retail Price (RP) – Markup (MU) = Cost (C)
Retail Price (RP) – Cost (c) = Markup
Practice 1
• Use the retail price formula and its variations to do the following problems:1. A calculator costs AB Products $15, and the
markup is $10. What is its retail price?
2. A tennis racket retails for $175, and its markup is $85. What is its cost?
Percentage Markup
• Companies choose to base the markup on retail price for three reasons:1. The markup on the retail price sounds like a
smaller amount.
2. Future markdowns and discounts are calculated on a retail basis.
3. Profits are generally calculated on sales revenue.
Steps used to Calculate Percentage Markup
• Assume you want to calculate the percentage markup on a pair of bookends from Target:– Cost is $49.50 and sells for $82.50Steps:1.Determine the dollar markup (RP-C=MU ($)
$82.50-$49.50 = $33.00
2.To change the dollar markup to the percentage markup, divide it by the retail price. MU ($)/RP=MU (%) on retail$33.00/$82.40 = .40
3.Change the decimal to a percentage. This figure is percentage markup on retail..40 = 40%
Percentage Markup on Cost
Steps:1.Determine the dollar markup RP-C=MU($)
$82.50-$49.50=$33.002.To change the dollar markup to the
percentage markup, divide by cost. MU($)/C=MU(%) on cost $33.00/$49.50=.6667
3.Change the decimal to the percentage. This is the percentage markup on cost..6667=66.67%
**Do practice 2 problem on page 486
Markup Equivalents Table
• Page 487 – do problems.
Cost Method of Pricing
• Sometimes marketers know only the cost of an item and its markup on cost.
• Consider a board game that Toys R’ Us buys for $8.50 and sells for a cost plus a 40 percent markup on cost.
To find retail price:1. Determine the dollar markup on cost. C X MU(%)
= MU($) $8.50 x .40 = $3.402. Add the dollar markup to the cost to get the retail
price. C + MU($) = RP $8.50 + $3.40 = $11.90
Typical Markup PercentagesProduct Category
• Small Appliances (microwave, coffee maker)
• Large Appliances (refrigerator, dryer)
• Automobiles
• Automobile Accessories (sunroof, CD Player)
• Clothing
Typical Markup Percentage Based on Cost
• 30%
• 15-20%
• 5-10% (*note dealers make money on factory incentives and sale of accessories)
• 15-25%• 100%
Retail Method of Pricing
• Another way to compute the retail price when all you know are cost and markup on retail is to use the retail method.
• Example: Owner of sporting goods store wants to know the what the markup and retail price should be for a sun visor that costs $6.75
Steps for Retail Method of Pricing
1. Determine what percentage of the retail price is equal to cost. RP(%) – MU(%) = C (%)100%-40%=60%
2. To determine the retail price, divide cost by the decimal equivalent of the percentage calculated in step 1. $6.75/.60= $11.25
3. Calculate the dollar markup RP – C = MU($)$11.25 - $6.75 = $4.50
4. Check your work by multiplying the retail price you calculated in Step 2 by the percentage markup on retail given originally. Answer should match dollar markup calculated in step 3.
RP X MU (%) = MU($)$11.25 x .40 = $4.50
Markdowns
• To reduce the quantity of goods in stock, a business will sometimes mark down merchandise by a certain percentage.
• Reduction is based on retail price.Example: Record store wants to mark down by 25 percent CDs that originally sold for $16.
Steps1. Determine the dollar markdown RP x MD(%)= MD ($)
$16 x .25 = $42. To determine the sale price, subtract the markdown
from the retail price. RP – MD($) = SP$16 - $4 = $12
Practice Problem
• Calculate the sale price:
A suit that sells for $225 is to be marked down 40 percent. What is its new price?
Answer is…
• $135
100%-40% = 60%; $225 x .60 = $135
Maintained Markup
• 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.
• Reductions in the original retail price include employee discounts, damaged goods allowances and special sales events.
Example of Maintained Markup• Assume that a cassette recorder that cost Best Buy $25 and
originally sold for $50 is marked down 20 percent. Maintained Markup is calculated as follows:1. Calculate the new sale price 100%-20%=80%
$50 x .80 = $402. To determine the maintained markup in dollars (MM$),
subtract cost from sale price (SP)SP – C = MM($) $40 - $25 = $15
3. To determined (MM%) divide (MM$) by Sale price (SP)MM($) / SP = MM(%)$15/$40=.375 37.5 percent
Discounts
• Discount is a reduction in the price of goods and services sold to customers.
• Ways to discount:– Retailers offer discounts to their employees
as a job benefit – Manufacturers and distributors offer discounts
to their customers to encourage prompt payment and stimulate business.
Steps To Calculate Discounts
1. Multiply Price (P) by the discount percentage D(%) to get the dollar amount of the discount D($) P x D(%) = D($)
2. Subtract the discount from the price to get the net price (NP) or the amount that customer will actually pay.
P – D($) = NP
Example
• A business is offering a 35 percent discount on an item that sells for $150
Answer
• $150 x .35 = $52.50 D($)
• $150 – 52.50 = $97.50 (NP)
Employee Discounts
• Encourages workers to buy the products they sell or manufacture.
• Employees who buy and use their company’s products project confidence in and enthusiasm about the products.
• Discounts range from 10 percent to 30 percent for entry level employees
• Can be from 50 percent and higher to top level executives
Look at calculations of discounts
• Page 493-495