Why Businesses Use Markup? Why the markup? Cover businesses operating expenses Cover Taxes Make a profit

Overhead Expenses The markup on the products that you sell must cover your overhead or operating expenses Overhead expenses include wages and salaries of employees, rent, utility charges, and taxes, supplies, advertising, miscellaneous expense Also known as Operating Expenses

Overhead Expenses Formula: Retail price * Overhead Percentage Overhead is an estimated percentage of retail price Same as your overhead expenses for gross sales If your total overhead expenses are 40% of gross sales, what % of your retail price on each item would be overhead? 40% (use the same as for gross sales) The exact overhead expense on each item sold is difficult to determine accurately. You may approximate the overhead expense of each item. For example, if your total overhead expenses are 40% of total sales, you may estimate the overhead expense of each item sold to be 40% of its retail price. Net Profit vs Net Loss When the markup of an item is greater than its overhead expenses, you make a net profit on the item. When the markup of an item is less than its overhead expense, you make a net profit on the item.

Example: Overhead Your total overhead expenses are 15% of total gross sales of $1 million dollars. If you have an item that costs $1000 and sells for $1333: What is your overhead percentage? 15% What is the overhead amount on that one item? $1333 X .15 = What is the Markup amount on this item? $1333 – 1000 = $199.95 Of means Multiplication 40% of $399.99 .4 x 399.99 159.996 Rounds to $160.00 $333

Overhead Expenses Net Profit/Loss = subtracting your overhead expenses from your revenue (markup) Profit: you made more money than you spent When your Markup > Overhead expense Loss: You spent more than you made If Markup < Overhead expense Example: Do we have Net Profit or Net Loss? Markup = $333 and Overhead = $199.95 What is the amount of our Net Profit? The exact overhead expense on each item sold is difficult to determine accurately. You may approximate the overhead expense of each item. For example, if your total overhead expenses are 40% of total sales, you may estimate the overhead expense of each item sold to be 40% of its retail price. Net Profit vs Net Loss When the markup of an item is greater than its overhead expenses, you make a net profit on the item. When the markup of an item is less than its overhead expense, you make a net profit on the item. Net Profit

Formula for Net Profit Three Step Formula: Markup = Retail Price – Cost Overhead = Overhead % * Retail Price Net Profit = Markup – Overhead

Your total overhead expenses are 15% of total gross sales of $1 million dollars. If you have an item that costs $1000 and sells for $1333: What is your net profit? Markup = 1333- 1000 = $333 Overhead = 1333 X .15 = $199.95 Net Profit = $333 - $199.95 = $133.05

Examples Retail price is $140. Cost is $56. Overhead is 50% of retail price. Find the markup, overhead, and net profit. Markup = Retail Price – Cost Markup = $140-$56 Markup = $84 Overhead = Overhead Percent * Retail Price 50% of retail price Overhead = .50 * $140 Overhead = $70 $70 is spent to cover any expense the business incurs Net Profit/Loss = Markup – Overhead Net Profit = $84 – $70 Net Profit = $14.00 First Click will display example. 2, 3, 4th clicks will display the formulas. Clicks 5, 6, and 7 will display the answers. Markup = Retail Price – Cost Markup = 140-56 Markup = 84 Overhead = Overhead Percent * Retail Price 50% of retail price Overhead = .5 * 140 Overhead = 70 $70 is spent to cover any expense the business incurs Net Profit = Markup – Overhead Net Profit = 84 – 70 Net Profit = $14.00

Example Bob’s Sport Shop purchases 15-foot rowboats for $44.98 each. Bob sells the boats for $89.99 each. Bob estimates his overhead expenses to be 40% of the retail price of his merchandise. What is the net profit on each 15-foot rowboat? Read problem and allow the students time to answer the problem. Answer is displayed on the next slide. Markup = Retail Price – Cost Markup = 89.99 – 44.98 Markup = 45.01 Overhead = Overhead Percent * Retail Price 40% of retail price Overhead = .4 * 89.99 Overhead = 35.996 Overhead = $36.00 $36 is spent to cover any expense the business incures Net Profit = Markup – Overhead Net Profit = 45.01 - 36 Net Profit = $9.01

Answer to Example Markup = Retail Price – Cost Markup = 89.99 – 44.98 Overhead = Overhead Percent * Retail Price 40% of retail price Overhead = .40 * 89.99 Overhead = 35.996 Overhead = $36.00 $36 is spent to cover any expense the business incurs Net Profit = Markup – Overhead Net Profit = 45.01 - 36 Net Profit = $9.01

Sales Tax Sales Tax: additional amount added to the retail price of a product(s) is collected by retailers and paid to state governments Formula: Sales tax percentage * Retail price Retail price + Sales Tax = gross sale What is the sales tax in our city? 7.5% Most state levy a sales tax on retail purchases. To calculate sales tax, change the sales tax percentage to a decimal and multiply by the purchases’ subtotal. To determine the total amount payable by the customer, including sales tax, add the sales tax to the subtotal.

Sales Tax Example Example 1: Purchases total $78.50 with Sales Tax 7.5% What is the sales Tax $? Sales Tax = 78.50 * .075 = 5.89 What is the Gross Sale or Total Due? Gross Sale: 78.50 + 5.89 = $84.39 Example 2: Purchases total $86.50 with Sales Tax 7.5% Sales Tax = $86.50 * .075 = 6.49 Gross Sale: $86.50 + 6.49 = $92.99 Calculate the sales tax and total amount due for customer #1.

Short Cut Example Purchases total $78.50 with a sales tax rate of 7.5% Completed in one Step: 86.50 * 1.075 = 92.99 Calculate the sales tax and total amount due for customer #1.

Now lets practice on your own Making Sense of Markups Worksheet