Markups and Markdowns: Perishables and Breakeven Analysis Product Pricing Management (PPM712S)

Learning objectives Markups Based on Cost (100%) Calculate dollar markup and percent markup on cost. Calculate selling price when you know cost and percent markup on cost. Calculate cost when dollar markup at percent markup on cost are known. Calculate cost when you know the selling price and percent markup on cost.

Learning objectives Markup Based on Selling Price (100%) Calculate dollar markup and percent markup on selling price. Calculate selling price when dollar markup and percent markup on selling price are known. Calculate selling price when cost and percent markup on selling price are known. Calculate cost when selling price and percent markup on selling price are known. Convert from percent markup on cost to percent markup on selling price, and vice versa. Markdowns and Perishables Calculate markdowns; compare markdowns and markups. Price perishable items to cover spoilage loss.

Learning objectives Breakeven Analysis Calculate contribution margin. Calculate breakeven point.

Selling Price - The price retailers charge customers. Terminology Selling Price - The price retailers charge customers. Cost - The price retailers pay to a manufacturer or supplier to bring goods into the store. Markup, Margin, or Gross Profit - The difference between the cost of bringing the goods into the store and the selling price of the goods. Operating Expenses or Overhead - The regular expenses of doing business, such as wages, rent, utilities, insurance, and advertising. Net Profit or Net Income - The profit remaining after subtracting the cost of bringing the goods into the store and the operating expenses from the sale of the goods (including any returns or adjustments).

Markup pricing Mark-up pricing the most popular method used by wholesalers and retailers to establish a selling price, does not directly analyze the costs of production. Mark-up is the cost of buying the product from the producer, plus amounts for profit and for expenses not otherwise accounted for. The total determines the selling price. E.g. A retailer adds a certain percentage to the cost of the merchandise received to arrive at the retail price. An item that costs the retailer N$1.80 and is sold for N$2.20 carries a mark-up of 40c, which is a mark-up of 22 per cent of the cost (40c/N$1.80). NB: Retailers ten to discuss mark-up in terms of its percentage of the retail price – in this example, 18 per cent (40c/N$2.20). The difference between the retailer’s cost and the selling price (40c) is the gross margin.

Mark-up formulae and calculations Mark-up on cost, or cost plus, formula gives profit margin expressed as a percentage of cost: Mark-up on cost = Price – Marginal Cost Marginal Cost 2. By of contrast, the mark-up on price formula gives profit margin expressed as a percentage of price: Mark-up on Price = Price – Marginal Cost Price Each mark-up formula provides a useful, but different, perspective on the relative magnitude of the difference between price and cost, or the profit margin.

Mark-up formulae and calculations Use the following data to calculate the relevant markup on cost and markup on price for the following five items: Product Price (N$) Marginal Cost Mark-up on cost (%) Mark-up on price (%) A 20 2 ? B 30 6 C 40 12 D 50 E 60

Mark-up formulae and calculations Use the following data to calculate the relevant markup on cost and markup on price for the following five items: Product Price (N$) Marginal Cost Mark-up on cost (%) Mark-up on price (%) A 20 2 900 90 B 30 6 400 80 C 40 12 233.3 70 D 50 150 60 E 100

Mark-up formulae and calculations Paulus Hamata is a project coordinator at Tura Paints, a large Katutura-based painting contractor. Hamata has asked you to complete an analysis of profit margins earned on a number of recent projects. Unfortunately, your predecessor on this project was abruptly transferred to Rundu, leaving you with only sketchy information on the firm’s pricing practices. Use the available data to complete the following table:

Mark-up formulae and calculations Price (N$) Marginal Cost (N$) Mark-up on cost (%) Mark-up on price (%) 100 25 300.0 75.0 240 72 ? 680 272 150.0 60.0 750 100.0 2800 40.0 2700 33.3 3360 20.0 5800 10.0 6250 5.3 10000 0.0

Mark-up formulae and calculations Price (N$) Marginal Cost (N$) Mark-up on cost (%) Mark-up on price (%) 100 25 300.0 75.0 240 72 233.3 70.0 680 272 150.0 60.0 750 375 100.0 50.0 2800 1680 66.7 40.0 3600 2700 33.3 25.0 4200 3360 20.0 5800 5220 11.1 10.0 6250 5938 5.3 5.0 10000 0.0

Basic Selling Price Formula Assume Gap plans to sell hooded fleece jackets for $23 that cost them $18. The markup (M) is a dollar amount, or a dollar markup.

Markups Based on Cost (100%) Cost + Markup = Selling price 100% 27.78% 127.78% Cost is 100% - the Base Dollar markup is the portion Percent markup on cost is the rate

Calculating Dollar Markup and Percent Markup on Cost Gap buys fleece jackets for $18. They plan to sell them for $23. What is Gap’s markup? What is the percent markup on cost? Dollar markup = Selling price -- Cost $ 5 = $23 -- $18 Percent markup on cost = Dollar markup Cost $5 $18 = 27.78% or .2778 Cost (B) = Dollar markup Percent markup on cost $5 .2778 = $18 Check Selling price = Cost + Markup $23 = $18 + .2778($18) $23 = $18 + $5

Calculating Selling Price When You Know Cost and Percent Markup on Cost Mel’s Furniture bought a lamp that cost $100. To make Mel’s desired profit, he needs a 65% markup on cost. What is Mel’s dollar markup? What is his selling price? S = C + M S = $100 + .65($100) S = $100 + $65 S = $165 Dollar Markup Selling Price

Calculating Cost When You Know Selling Price and Percent Markup on Cost Jill Sport, owner of Sports, Inc., sells tennis rackets for $50. To make her desired profit, Jill needs a 40% markup on cost. What do the tennis rackets cost Jill? What is the dollar markup? S (Selling Price) = C (Cost) + M (Markup) $50 = C + .40(C) $50 = 1.40C 1.40 1.40 $35.71 = C Calculate the cost: Calculate the dollar markup: M = S - C M = $50 - $35.71 M = $14.29

Markups Based on Selling Price (100%) Percent (%) markup on selling price is the rate (R) Dollar ($) markup is the portion (P) Selling price is 100% - the base (B) Cost + Markup = Selling price 78.26% + 21.74% = 100%

Calculating Dollar Markup and Percent Markup on Selling Price The cost to Gap for a hooded fleece jacket is $18; the store then plans to sell them for $23. What is Gap’s dollar markup? What is its percent markup on selling price? Dollar markup = Selling price -- Cost $ 5 = $23 -- $18 Percent markup on selling price = Dollar markup Selling price $5 = 21.74% $23 Check Selling price = Cost + Markup 23 = 18 + .2174($23) $23 = $18 + $5 Selling price (B) = Dollar markup (P) Percent markup on SP (R) $5 = $23 .2174

Compare markup on cost versus markup on selling price Percent Markup Based on Selling Price Percent Markup Based on Cost $5 = 21.74% $23 $5 = 27.78% $18 Be careful to substitute the correct value – selling price or cost – into the denominator.

Calculating Selling Price When You Know Cost and Percent Markup on Selling Price Mel’s Furniture bought a lamp that cost $100. To make Mel’s desired profit, he needs a 65% markup on selling price. What are Mel’s selling price and his dollar markup? S (Selling price) = C (Cost) + M (Markup) Calculate the selling price: S = $100 + .65S - .65S - .65S .35S = $100 .35 .35 S = $285.71 Calculate the dollar markup: M = S -- C M = $285.71 -- $100 M = $185.71

Calculating Cost When You Know Selling Price and Percent Markup on Selling Price Jill Sport, owner of Sports, Inc., sells tennis rackets for $50. To make her desired profit, Jill needs a 40% markup on selling price. What is the dollar markup? What do the tennis rackets cost Jill? S (Selling price) = C (Cost) + M (Markup) $50 = C + .40($50) $50 = C + $20 - $20 - $20 $30 = C Dollar Markup

Markup based on cost versus markup based on selling price (Table 12.1)

Conversion Formula for Converting Percent Markup on Cost to Percent Markup on Selling Price: Percent markup on cost 1 + Percent markup on cost .2778 = 21.74% 1 + .2778 Formula for Converting Percent Markup on Selling Price to Percent Markup on Cost: Percent markup on selling price 1 -- Percent markup on selling price .2174 = 27.78% 1 -- .2174

Markdowns Markdown percent = Dollar markdown Selling price (original) Dollar markup = Original selling price – New selling price Example: Kmart marked down an $18.00 video to $10.80. Calculate the dollar markdown and the markdown percent. $18.00 -- $10.80 = $7.20 markdown Dollar markdown = $7.20 = 40% Selling price (original) $18.00

Pricing Perishable Items Audrey’s Bake Shop baked 20 dozen bagels. Audrey expects 10% of the bagels to become stale and not salable. The bagels cost Audrey $1.20 per dozen. Audrey wants a 60% markup on cost. What should Audrey charge for each dozen of bagels so she will make her profit? TC (Total Cost) = 20 dozen x $1.20 = $24.00 TS (Total Sales) = TC + TM (Total Markup) TS = $24 + .60($24) TS = $24 + $14.40 TS = $38.40 Total dollar markup Total selling price 20 dozen X .10 = 2 dozen $38.40 = $2.13 18 Selling price per dozen 20 -- 2

Calculating a Contribution Margin (CM) Contribution margin (CM) = Selling price (S) – Variable cost (VC) Example: Assume Jones Company produces pens that have a selling price (S) of $2.00 and a variable cost (VC) of $.80. We calculate the contribution margin (CM) as follows. CM = $2.00 (S) -- $.80 (VC) CM = $1.20

Calculating a Breakeven Point (BE) Breakeven point (BE) = Fixed costs (FC) Contribution margin (CM) Example: Jones Company produces pens. The company has a fixed cost (FC) of $60,000. Each pen sells for $2.00 with a variable cost (VC) of $.80 per pen. Breakeven point (BE) = $60,000 (FC) = 50,000 units (pens) $2.00 (S) - $.80 (VC) At 50,000 units (pens), Jones Company is just covering its costs. Each unit after 50,000 brings in a profit of $1.20 (CM).