Chapter 27 Pricing Math1 Marketing Essentials Chapter 31 Pricing Math Section 31.1 Calculating Prices

Chapter 27 Pricing Math2 SECTION 31.1 What You'll Learn Calculating 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

Chapter 27 Pricing Math3 SECTION 31.1 Calculating Prices Why 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.

Chapter 27 Pricing Math4 SECTION 31.1 Calculating Prices 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

Chapter 27 Pricing Math5 SECTION 31.1 Calculating Prices 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) Practice #1 pg. 408

Chapter 27 Pricing Math6 SECTION 31.1 Calculating Prices 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

Chapter 27 Pricing Math7 SECTION 31.1 Calculating Prices Percentage Markup on Retail Product: Bookshelf Cost: $49.50 Retail Price: $99 $ Mark-up: $ $49.50 = $49.50 % Mark-up: $49.50/$99.00 =.5 = 50% Percentage Markup on Cost Product: Bookshelf Cost: $49.50 Retail Price: $99 $ Mark-up: $ $49.50 = $49.50 % Mark-up: $49.50/$49.50 = 1 = 100% Practice #2 pg. 408

Chapter 27 Pricing Math8 SECTION 31.1 Calculating Prices 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 CategoryTypical 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%

Chapter 27 Pricing Math9 SECTION 31.1 Calculating Prices 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(% based on cost ) = MU($)  Add the dollar markup to the cost to get the retail price: C + MU($) = RP Cost Method of Pricing Slide 1 of 2

Chapter 27 Pricing Math10 SECTION 31.1 Calculating Prices Product: Bookshelf Cost: $49.50 MU ( on cost ) : 100% C x MU(% on cost ) = MU($) $49.50 x 100% = $49.50  Add the dollar markup to the cost to get the retail price: C + MU($) = RP $ $49.50 = $99 Cost Method of Pricing - Example Slide 1 of 2

Chapter 27 Pricing Math11 SECTION 31.1 Calculating Prices 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(% on retail ) = 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

Chapter 27 Pricing Math12 SECTION 31.1 Calculating Prices Product: Bookshelf Cost: $49.50 MU ( on retail ) : 50%  Determine what percentage of the retail price is the cost: RP(%) - MU(% on retail) = C(%) (retail price would be 100%) 100% - 50% = 50%  Determine the retail price by dividing the cost by the decimal equivalent of the cost percentage: C($) / C(%) = RP $49.50 /.50 = $99  Calculate the dollar markup: RP - C = MU($) $ $49.50 = $49.50 Practice #4 pg. 410 Retail Method of Pricing

Chapter 27 Pricing Math13 SECTION 31.1 Calculating Prices 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

Chapter 27 Pricing Math14 SECTION 31.1 Calculating Prices 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

Chapter 27 Pricing Math15 SECTION 31.1 Calculating Prices Product: Bookshelf Selling Price: $99 Discount : 40%  Determine the dollar markdown by multiplying the retail price by the percentage markdown: RP x MD(%) = MD($) $99 x.4 = $39.60  Subtract the dollar markdown from the retail price to get the sale price: RP - MD($) = SP $99 - $39.60 = $59.4 Calculations for Lowering Prices Slide 2 of 2

Chapter 27 Pricing Math SECTION 31.1 Calculating Prices Product: Bookshelf Selling Price: $49.50 Discount : 40%  Subtract the markdown percentage from 100% (representing retail price): RP(%) - MD(%) = SP (%) (RP = 100%) 100% - 40% = 60%  Multiply the retail price by the decimal equivalent of the percentage sale price: RP x SP(%) = SP($) $99 x.6 = $59.4 Practice #5 and #6 pg. 412 Calculations for Lowering Prices Slide 2 of 2