Pricing Math Chapter 27

Basic Pricing Concepts Markup pricing: the difference between the price of an item and its cost that is generally expressed as a percentage. Markups on products must be high enough to cover expenses and included intended profit Cost-plus pricing: all costs and expenses are calculated, and then the desired profit is added to arrive at a price. Demand-oriented pricing: determine what consumers are willing to pay for given goods and services.

Profit vs. Markup Profit is the amount left from revenue after the costs of the merchandise Markup is similar to gross profit Gross profit: difference between sales revenue and the cost of goods sold. A business must have a markup high enough to cover expenses and provide the profit to be successful.

Basic Markup Calculations Same formulas to calculate markups in every industry: Cost (C) + Markup (M) = Retail Price (RP) Two other formulas can be derived from this basic formula – cost and markup: Retail Price (RP) – Markup (MU) = Cost (C) Retail Price (RP) – Cost (c) = Markup

Practice 1 Use the retail price formula and its variations to do the following problems: A calculator costs AB Products $15, and the markup is $10. What is its retail price? A tennis racket retails for $175, and its markup is $85. What is its cost?

Percentage Markup Companies choose to base the markup on retail price for three reasons: The markup on the retail price sounds like a smaller amount. Future markdowns and discounts are calculated on a retail basis. Profits are generally calculated on sales revenue.

Steps used to Calculate Percentage Markup Assume you want to calculate the percentage markup on a pair of bookends from Target: Cost is $49.50 and sells for $82.50 Steps: Determine the dollar markup (RP-C=MU ($) $82.50-$49.50 = $33.00 To change the dollar markup to the percentage markup, divide it by the retail price. MU ($)/RP=MU (%) on retail $33.00/$82.40 = .40 Change the decimal to a percentage. This figure is percentage markup on retail. .40 = 40%

Percentage Markup on Cost Steps: Determine the dollar markup RP-C=MU($) $82.50-$49.50=$33.00 To change the dollar markup to the percentage markup, divide by cost. MU($)/C=MU(%) on cost $33.00/$49.50=.6667 Change the decimal to the percentage. This is the percentage markup on cost. .6667=66.67% **Do practice 2 problem on page 486

Markup Equivalents Table Page 487 – do problems.

Cost Method of Pricing Sometimes marketers know only the cost of an item and its markup on cost. Consider a board game that Toys R’ Us buys for $8.50 and sells for a cost plus a 40 percent markup on cost. To find retail price: Determine the dollar markup on cost. C X MU(%) = MU($) $8.50 x .40 = $3.40 Add the dollar markup to the cost to get the retail price. C + MU($) = RP $8.50 + $3.40 = $11.90

Typical Markup Percentages Product Category Typical 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 factory incentives and sale of accessories) 15-25% 100%

Retail Method of Pricing Another way to compute the retail price when all you know are cost and markup on retail is to use the retail method. Example: Owner of sporting goods store wants to know the what the markup and retail price should be for a sun visor that costs $6.75

Steps for Retail Method of Pricing Determine what percentage of the retail price is equal to cost. RP(%) – MU(%) = C (%) 100%-40%=60% To determine the retail price, divide cost by the decimal equivalent of the percentage calculated in step 1. $6.75/.60= $11.25 Calculate the dollar markup RP – C = MU($) $11.25 - $6.75 = $4.50 Check your work by multiplying the retail price you calculated in Step 2 by the percentage markup on retail given originally. Answer should match dollar markup calculated in step 3. RP X MU (%) = MU($) $11.25 x .40 = $4.50

Markdowns To reduce the quantity of goods in stock, a business will sometimes mark down merchandise by a certain percentage. Reduction is based on retail price. Example: Record store wants to mark down by 25 percent CDs that originally sold for $16. Steps Determine the dollar markdown RP x MD(%)= MD ($) $16 x .25 = $4 To determine the sale price, subtract the markdown from the retail price. RP – MD($) = SP $16 - $4 = $12

Practice Problem Calculate the sale price: A suit that sells for $225 is to be marked down 40 percent. What is its new price?

Answer is… $135 100%-40% = 60%; $225 x .60 = $135

Maintained Markup When a marketer marks down goods, the markup and markup percentage change. The difference between an item's final sale price and its cost is called the maintained markup. Reductions in the original retail price include employee discounts, damaged goods allowances and special sales events.

Example of Maintained Markup Assume that a cassette recorder that cost Best Buy $25 and originally sold for $50 is marked down 20 percent. Maintained Markup is calculated as follows: Calculate the new sale price 100%-20%=80% $50 x .80 = $40 To determine the maintained markup in dollars (MM$), subtract cost from sale price (SP) SP – C = MM($) $40 - $25 = $15 To determined (MM%) divide (MM$) by Sale price (SP) MM($) / SP = MM(%) $15/$40=.375 37.5 percent

Discounts Discount is a reduction in the price of goods and services sold to customers. Ways to discount: Retailers offer discounts to their employees as a job benefit Manufacturers and distributors offer discounts to their customers to encourage prompt payment and stimulate business.

Steps To Calculate Discounts Multiply Price (P) by the discount percentage D(%) to get the dollar amount of the discount D($) P x D(%) = D($) Subtract the discount from the price to get the net price (NP) or the amount that customer will actually pay. P – D($) = NP

Example A business is offering a 35 percent discount on an item that sells for $150

Answer $150 x .35 = $52.50 D($) $150 – 52.50 = $97.50 (NP)

Employee Discounts Encourages workers to buy the products they sell or manufacture. Employees who buy and use their company’s products project confidence in and enthusiasm about the products. Discounts range from 10 percent to 30 percent for entry level employees Can be from 50 percent and higher to top level executives

Look at calculations of discounts Page 493-495