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

Learning objectives Markups Based on Cost (always x 100%, because it’s shown as a percentage%) Calculate dollar markup and percent markup on cost. Wilbard Calculate selling price when you know cost and percent markup on cost. Tuhafeni Calculate cost when dollar markup at percent markup on cost are known. Hatutale Calculate cost when you know the selling price and percent markup on cost. Shatiwa

Learning objectives Markup Based on Selling Price (always x 100%, because it’s shown as a percentage%) Calculate dollar markup and percent markup on selling price. Hauholo & Jojo Calculate selling price when dollar markup and percent markup on selling price are known. Kapesi & Mutenge Calculate selling price when cost and percent markup on selling price are known. Grace & Ndokosho Calculate cost when selling price and percent markup on selling price are known. Andorius & Haingura Convert from percent markup on cost to percent markup on selling price, and vice versa. Mohamed Markdowns and Perishables Calculate markdowns; compare markdowns and markups. Rhode Price perishable items to cover spoilage loss. Van neel

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

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 is 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 tend to discuss mark-up in terms of its percentage of the retail price /selling price– in this example, mark-up of 18 per cent on selling price (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 Selling price = Cost + Markup   S = C + M 3 = 2 + 1   M = S - C 1 = 3 - 2 C = S - M = 3 - 1 C + M = S 2 + 1 = 3 Mark-up formulae and calculations

Mark-up formulae and calculations cost price = selling price – profit/mark-up         cost price = selling price – profit/markup% × cost price/100         cost price + profit/markup% × cost price/100 = selling price         cost price(1 – profit/markup%)/100 = selling price         cost price(100 + profit/markup%)/100 = selling price Also, cost price = selling price × 100/100 + profit/markup% (on cross multiplication) Mark-up formulae and calculations

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 Easy 233.3 Easy 70.0 680 272 150.0 60.0 750 A 375 100.0 B 50.0 2800 C 1680 D 66.7 40.0 E 3600 2700 33.3 F 25.0 G 4200 3360 H 25.0 20.0 5800 I 5220 J 11.1 10.0 6250 K 5938 5.3 L 5.0 10000 M 10000 N 0.0 0.0

Mark-up formulae and calculations Price Marginal Cost (N$) Mark-up on cost (%) Mark-up on price (%) 750 ? 100.0 ? A 375 Selling Price = Cost + Mark-up Easy formula = 100% on cost then it must be half ½ of 750? 375? S = Mark-up on Cost which is a % should be divided by 100 to give you a number to work with + (M X C in the formula) 750 = (100% mark-up on cost /100 = 1) + (1X 1C) The 1 being part of the formula, its supposed to be m x c but a (1) is shown/included as part of the formula 750 = 1 + 1C So to isolate the C 750 2 = 375 = C (Marginal Cost) B 50.0 (Easy?) 375 0.5 X 100 = 50% (Mark-up on Price)

Mark-up formulae and calculations Price Marginal Cost (N$) Mark-up on cost (%) Mark-up on price (%) ? 185 8.5 ? (7.84) Selling Price = Cost + Mark-up Cost = Selling Price – Mark-up We cannot use the same formula because the other one was mark-up on price % as a % of price in N$ Value This calculation looks at cost % in relation to price in N$ Value Therefore we need to calculate 8.5 mark-up on cost % and transform it to N$ value to add to N$185. S = 185 + 8.5% S = 185 + (8.5% of 185) to find dollar value added/markup on Cost 8.5 x 185 = 15.73 100 S = 185 + 15.73 S = 200.73

Mark-up formulae and calculations Price Marginal Cost (N$) Mark-up on cost (%) Mark-up on price (%) 2800 ? ? 40% N$ 1120 C 1680 Selling Price = Cost + Mark-up Cost = Selling Price – Mark-up Cost = 2800 – M C = 2800 – ( 40% of 2800) 2800 x 40 = 112000 (40% of 2 800) = 1120 100 C = 2800 - 1120 mark-up on price, Dollar Value = 40% Mark-up on price % C = 1680 D 66.7 (Easy?) 2800 – 1680/1680 0.666 x 100 = 66.7% (Mark-up on Cost)

Mark-up formulae and calculations Price Marginal Cost (N$) Mark-up on cost (%) Mark-up on price% (%) ? 2700 33.3% ? N$900 dollar value (When its 0 decimal places) N$899.10 dollar value (When it’s 2 decimal places) E 3600 Selling Price = Cost + Mark-up S = 2700 + M S = 2700 + ( 33.3% of 2700) to find dollar value added/markup on Cost 2700 x 33.3 = 89910 (33.3% of 2 700) = 900 (899.10) 100 S = 2700 + 900 S = 3600 F 25.0) 3600 – 2700/3600 0.25 x 100 = 25.% (Mark-up on Price)

Mark-up formulae and calculations Price Marginal Cost (N$) Mark-up on cost (%) Mark-up on price% ? 3360 ? 20% G 4200 Selling Price = Cost + Mark-up S = 3360 + 20% (so 80% should be the Selling Price? To give a 100%?) S = 3360 X 100 80 S = 4200 H 25.0) 4200 – 3360/3360 0.25 x 100 = 25.% (Mark-up on Price)

Mark-up formulae and calculations Price Marginal Cost (N$) Mark-up on cost (%) Mark-up on price% 5800 ? ? 10% N$ 580 dollar value I 5220 Selling Price = Cost + Mark-up Cost = Selling Price – Mark-up C = 5800 – M C = 5800 – (10% of 5800) > 5800 x 10/100 = 580 C = 5800 - 580 C = 5220 J 11.1 5800 – 5220/5220 0.11 x 100 = 11.1% (Mark-up on Cost) 0 decimal place 0.12 x 100 = 12% 2 decimal place

Mark-up formulae and calculations Price Marginal Cost (N$) Mark-up on cost (%) Mark-up on price% 6250 ? 5.3 ? N$331-25 dollar value K 5938 Selling Price = Cost + Mark-up Cost = Selling Price – Mark-up C = 6250 – M C = 6250 – 5.3 (so 94.7% should be the Cost Price? To give a 100%?) C = 6250 - (6250 x 94.7%/100) C = 5918.75 L 5.0 6250 – 5918.75/6250 = 5.3% (Mark-up on price)

Mark-up formulae and calculations Price Marginal Cost (N$) Mark-up on cost (%) Mark-up on price% 10000 ? ? 0.0 M 5938 Selling Price = Cost + Mark-up Cost = Selling Price – Mark-up C = 10000 – M C = 10000 – 0 (so 100% should be the Cost Price? To give a 100%?) C = 10000 - (10000 x 100%/100) C = 10000 N 0.0 10000 – 10000/10000 = 0.0% (Mark-up on price)

Mark-up formulae and calculations Price Marginal Cost (N$) Mark-up on cost (%) Mark-up on price (%) 6250 ? 5.3 ? K 5839 Selling Price = Cost + Mark-up S = Mark-up on Cost which is a % should be divided by 100 to give you a number to work with + (M X C in the formula) 6250 = (5.3% mark-up on cost /100 = 0.053) + (0.053X 1C) 6250 = 0.053 + 0.053C So to isolate the C 6250 0.106 = 375 = C (Marginal Cost) B 5.0 (Easy?) 375 750 0.5 X 100 = 50% (Mark-up on Price)

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

Conversion Misu Sheet, owner of the Bedspread Shop, knows his customers will pay no more than N$100 for a comforter. Misu Sheet wants to advertise the comforter as "percent markup on cost." What is the equivalent rate of percent markup on cost compared to the 37% markup on selling price? (Round your answer to the nearest hundredth percent.) If it sells for N$100, and the markup is 37% of selling price, then the markup in N$ is _______ , and the cost in N$ is________. Therefore the markup on cost in % is_________ What is the Conversion rate?______________

Conversion Misu Sheet, owner of the Bedspread Shop, knows his customers will pay no more than $100 for a comforter. Misu Sheet wants to advertise the comforter as "percent markup on cost." What is the equivalent rate of percent markup on cost compared to the 37% markup on selling price? (Round your answer to the nearest hundredth percent.) One way is - If it sells for 100, and the markup is 37% of selling price, then the markup is 100 x .37 = 37, and the cost is 100 - 37 = 63. Therefore the markup on cost is 37/63 = 0.587... or about 58.7% Another way is – S = C + M and C = S – M C = 100 – (37% of 100) C = 100 – (37 x 100/100 = 37) C = 100 – 37 = 63 Markup on cost is 100-63/63 = 0.587 = 58.7%

Conversion One way is if M is the markup rate on selling price, the formula for mark rate on cost is M / (1 - M) That's (0.37) / (1 - 0.37= 0.63) = .587 which is 58.7 Another way is Percent markup on selling price 1 - Percent markup on selling price 0.37 1-0.37 = 0.63 = 0.587 which is 58.7 %

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/bread. 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 to become stale $38.40 = $2.13 18 Selling price per dozen 20 -- 2

Pricing Perishable Items Alvin’s vegetable stand grew 300 grams of tomatoes. He expects 5% of the tomatoes to become spoiled and not salable. The tomatoes cost Alvin N$14 per gram and he wants a 60% markup on cost. What price per gram should Alvin charge for the tomatoes? Round of to the nearest second decimal. 10 marks

Pricing Perishable Items Alvin’s vegetable stand grew 300 grams of tomatoes. He expects 5% of the tomatoes to become spoiled and not salable. The tomatoes cost Alvin N$.14 per gram and he wants a 60% markup on cost. What price per gram should Alvin charge for the tomatoes? 10 marks TC (Total Cost) = 300 grams x $.14 = $42.00 TS (Total Sales) = TC + TM (Total Markup) TS = $42 + .60($42) = 25.2 TS = $67.20 300 grams X .05 = 15 grams that will become spoiled $67.20 = $.23.58 285 grams Selling price per gram 300 grams – 15 grams

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 Assume Jones Company produces rulers that have a selling price (S) of $5.80 and a variable cost (VC) of $1.80. Calculate the contribution margin.

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).

Calculating a Breakeven Point (BE) Breakeven point (BE) = Fixed costs (FC) Contribution margin (CM) Example: Jones Company produces rulers. The company has a fixed cost (FC) of $125,500. Each ruler sells for $5.80 with a variable cost (VC) of $1.80 per ruler.

Calculating a Breakeven Point (BE) Breakeven point (BE) = Fixed costs (FC) Contribution margin (CM) Example: Jones Company produces rulers. The company has a fixed cost (FC) of $125,500. Each pen sells for $5.80 with a variable cost (VC) of $1.80 per pen. Breakeven point (BE) = $125,500 (FC) = 31,375 units (pens) $5.80 (S) - $1.80 (VC) At 31375 units (rulers), Jones Company is just covering its costs. Each unit after 31375 brings in a profit of $4 (CM).