17 Sample Markup Problems Ted Mitchell

#1 Cost of Product as Percent of Price (revenue per unit) You have purchased an apple for V = $2 and have a selling price P= $5 per apple. What is the cost of the apple as a percent of the selling price? Answer; Cost as Percent of price = V/P = 2/5 = 40%

#2 Selling price (revenue per unit) as Percent of Cost You have purchased an apple for V = $2 and have a selling price P= $5 per apple. What is the selling price of the apple to the cost of the apple? Answer Cost as Percent of price = P/V = 5/2 = 250%

3 Markup Problem A boy buys an apple for V = $2 and sells it for P = $5. What is his dollar markup or unit contribution (M) to Fixed costs and Profits? P - V = M $5 - $2 = M $3 = M = Unit per Unit Sold

4 Markup Problem A boy buys an apple for V = $2 and sells it for P = $5. What is his Markup on Price (Mp)? (P - V) / P = Mp ($5 - $2) / $5 = Mp $3/$5 = 0.6 = 60% =Mp

5 Discount Off List A store pays an apple distributor V = $2 per dollars per apple and sells it the suggested list price P = $5. What is the store’s Discount Off List or Markup (Mp)? (P - V) / P = Mp ($5 - $2) / $5 = Mp $3/$5 = 0.6 = 60% = Discount off list price

6 Commission Rate A store gives their salesmen a 60% commission on the sale of an apple. The selling price is $5 per apple and the cost of each apple to the store is $2. How many dollars does the salesperson earn every time he sells an apple? (P - V) / P = Mp ($5 - $2) / $5 = 60% commission Salesmen’s profit = P x Mp = $5 x 60% = $3

7 Discount Off List to Cost An apple distributor gives a store a 60% discount off the suggested list price of P = $5 per apple (i.e., Mp = 60%). What is the store’s cost per apple (V)? (P - V) / P = Mp (5 - V) / 5 = 0.6 5 - V = 0.6(5) = 2 2 = V or the cost per apple = $2

8 Given Markup on Price and Cost A boy buys an apple for V = $2 and sells it with a markup on price of 60% (i.e., Mp = 60%). What is the selling price of the apple? (P - V) / P = Mp (P - 2) / P= 0.6 P - 2 = 0.6P P -0.6P = 2 P = 2/.4 = 5 or the price per apple = $5

Many students simply memorize Cost based pricing equation to set a selling price using markup and variable cost is Price = (variable cost per unit)/(1-Mp) P = V/(1 - Mp) P = $2/(1-60%) P = $2/(1-0.6) P = $2/0.4 = $5

9 Markup on Cost A boy buys an apple for V = $2 and sells it for P = $5. What is the Markup on Cost (Mv)? (P - V) / V = Mv (5 - 2) / 2= Mv 3/2 = 1.50 = 150% = Mv Markup on cost = Mv = 150%

10 Convert Markup on Cost to Markup on Price You are told that a product has a markup on cost of 25% What is the product’s markup on price? (1/Mp) - (1/Mv) = 1 1/Mp – 1/0.25 = 1 1/Mp = 1 + 1/0.25 1/Mp = 1 + 4 = 5 Mp = 1/5 = 0.20 or 20%

11 Convert Markup on Cost to Markup on Price You are told that a product has a markup on cost of 25% What is the product’s markup on price? Make 25% into a fraction Mp = 25% = 25/100 “add the top part to the bottom part” 25/(25+100) And solve for Mp = 25/125 Mp = 25/125 = 0.20 or 20%

12 Chain Markdowns & Markups You marked down your selling price of $10 in the store by 10% two weeks ago, followed by a 20% markdown last week. This week you marked the price up by 15%. What is your current price? Current price = $10 x (1 - markdown #1) x (1 - markdown #2) x (1 + markup) Current price = $10 x (1-10%) x (1-20%) x (1+15%) Current price = $10 x 0.9 x 0.8 x 1.15 = $8.28

13 Chain Markdowns & Markups You marked down your original selling price of $10 in the store by 10% two weeks ago, followed by a 20% markdown last week. What is the size of the total percentage markdown or discount over the two events? Current price = $10 x (1-markdown #1) x (1-markdown #2) Current price = $10 x (1-10%) x (1-20%) Current price = $10 x 0.9 x 0.8 = $7.20 Total Markdown % = (Current price – Original Price)/(Original price) Total Markdown = ($10 -7.20)/$10 = -$2.80/$10 Total Markdown or Discount = -2.80/10 = -0.28 or -28%

14 Chain Markdowns & Markups You marked down your original selling price of $10 in the store by 10% two weeks ago, followed by a 20% markdown last week. What is the size of the total percentage markdown or discount? To solve directly Total discount = Discount 1 + Discount 2 + (Discount 1 x Discount 2) Total discount = D1 + D2 + (D1 x D2) Total discount = (-0.10) + (-0.20) + (-0.10 x -0.20) Total discount = -0.30 + 0.02 = -0.28 or -28%

15 Markups in a Channel of Distribution A retailer sells wagons at a list price $800 each and receives a 40% markup on price. His distributor gets a 20% markup on the price he sells the wagon for to the retailer The manufacturer get a 30% markup on the price he sells the wagon for to the distributor What is the dollar cost that the manufacturer pays to make each wagon? Manufacturer’s cost to make each wagon= $800 x (1-0.4) x (1-0.2) x (1-0.3) = $268.80

16 More Markups in a channel of distribution The manufacturer builds wagons for $228.80 each and sells them to a distributor with a markup on price of 60%. The distributor sells the wagons to a retailer. The retailer sells the wagons to the final consumer for $800 each and receives a 30% discount off the $800 suggested retail price. What dollar profit does the distributor make on each sale?

17 Markups in a Channel of Distribution A retailer sells wagons at a list price $800 each and receives a 40% markup on price. Pays the distributor 0.6 of $800 = $480 His distributor gets a 20% markup on the price he sells the wagon for to the retailer The distributor keeps 20% of the price he’s paid 0.2 x $480 = $96 and pays the manufacturer $480 – $96 = $384 The manufacturer get a 30% markup on the price he sells the wagon for to the distributor What is the dollar profit that the manufacturer makes on the sale of each wagon? Manufacturer’s profit per sale is 30% of the $384 price he is paid 0.3 x $384 = $115.20 His cost per wagon = $384 -$115.20 = $268.80

Markup problems are simple but you have think about them carefully If you rush, you can get them wrong.

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