1. Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

2. Chapter 10
Markups and Markdowns: Insight into Perishables; Cost-Profit-Volume and Breakeven Analysis
Prepared by Dr. Elena Skliarenko
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

3. #10 Learning Unit Objectives Markups and Markdowns
LU10.1
Markup 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
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

4. Learning Unit Objectives
#10
Markups and Markdowns
Learning Unit Objectives
LU10.2
Markup Based on Selling Price (100%)
Calculate dollar markup and percent markup on selling price
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 selling price to percent markup on cost and vice versa
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

5. Learning Unit Objectives
#10
Markups and Markdowns
Learning Unit Objectives
LU10.3
Markdowns and Perishables
Calculate markdowns; compare markdowns and markups
Price perishable items to cover spoilage loss
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

6. Learning Unit Objectives
#10
Markups and Markdowns
Learning Unit Objectives
LU10.4
Cost-Profit-Volume and Breakeven Analysis
Definitions and understanding of the terms
Contribution margin approach
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

7. Terminology Cost - The price retailers pay to a manufacturer
Selling Price - The price retailers charge customers
Markup, margin, or gross profit - The difference between the cost of bringing the goods into the store and the selling price
Operating expenses or overhead - The regular expenses of doing business such as rent, wages, utilities, etc.
Net profit or net income - The profit remaining after subtracting the cost of bringing the goods into the store and the operating expenses
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

8. Basic Selling Price Formula
Selling price (S) = Cost (C) + Markup (M)
$1,200
Computer
$900 - Price
paid to bring
computer
into store
$300 - Dollars to
cover expenses and profit
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

9. Markups Based on Cost (100%)
Dollar markup is the portion
Cost Markup = Selling Price
100% % %
Cost is 100% - the Base
Percent markup on cost is the rate
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

10. Calculating Dollar Markup and Percent Markup on Cost
Johnny buys Sunday’s newspapers for $ He plans to sell them for $ What is Johnny’s markup? What is his percent markup on cost?
Dollar Markup = Selling Price - Cost
$ = $ $1.00
Percent Markup on Cost = Dollar Markup
Cost
$ = 50%
$1.00
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

11. Calculating Selling Price When You Know Cost and Percent Markup on Cost
Ray’s Appliances bought a refrigerator for $150. To make desired profit, he needs a 60% markup on cost. What is Ray’s dollar markup? What is his selling price?
S = C M
S = $ ($150)
S = $ $90
S = $240
Dollar Markup
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

12. Calculating Cost When You Know Selling Price and Percent Markup on Cost
Jane’s imported flower business sells floral arrangements for $35. To make her desired profit, Jane needs a 40% markup on cost. What do the flower arrangements cost Jane? What is the dollar markup?
S = C M
$35 = C + .40(C)
$35 = 1.40C
$25 = C
M = S C
M = $35 - $25
M = $10
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

13. Markups Based on Selling Price (100%)
Dollar ($) markup is the portion (P)
Cost Markup = Selling Price
75% % %
Selling Price is 100% - the Base (B)
Percent (%) markup on selling price is the rate (R)
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

14. Calculating Dollar Markup and Percent on Selling Price
Johnny buys Sunday’s newspaper for $ He plans to sell them for $ What is Johnny’s markup? What is his percent markup on selling price?
Dollar Markup = Selling Price - Cost
$ = $ $1.00
Percent Markup on Selling Price = Dollar Markup
Selling Price
$ = 33%
$1.50
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

15. Calculating Selling Price When You Know Cost and Percent Markup on Selling Price
Ray’s Appliances bought a refrigerator for $150. To make desired profit, he needs a 60% markup on selling price. What is Ray’s selling price and dollar markup?
S = C M
S = $ (S)
-.60s S
.40S = $150
S = $375
M = S C
M = $375 - $150
M = $225
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

16. Calculating Cost When You Know Selling Price and and Percent Markup on Selling Price
Jane’s imported flower business sells floral arrangements for $35. To make her desired profit, Jane needs a 40% markup on selling price. What is the dollar markup? What do the flower arrangements cost Jane?
S = C M
$35 = C + .40($35)
$35 = C + $14
$14
$21 = C
Dollar Markup
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

17. Conversion
Formula for Converting Percent Markup on Cost to Percent Markup on Selling Price
Percent markup on cost
1+ Percent markup on cost
= = .33
Formula for Converting Percent Markup on Selling Price to Percent Markup on Cost
Percent markup on selling price
1- Percent markup on selling price
= = .50
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18. Equivalent Markup Percent markup on Percent markup on cost
Selling Price (round to nearest tenth percent)
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

19. Selling price (original)
Markdowns
Markdown percent = Dollar markdown
Selling price (original)
Sears marked down a $50 tool set to $36. What are the dollar markdown and the markdown percent?
$36
$50-$36
Markdown
$14
$50
28%
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20. Cost-Profit-Volume and Breakeven AnalysisP E C
Revenue
Break-Even Point
At the break-even point all expenses and costs are covered and profit or loss are equal to zero.
In other words, seller does not make any profit, but also does not face any loss. Each next unit, sold after a break-even point will bring some profit.
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

21. When you are in business you are dealing with two types of costs: fixed costs (FC) and variable costs (VC).
Fixed costs don’t change with increases or decreases in sales and variable costs change in direct proportion to the changes in volume of sales.
Fixed costs may include insurance, business license, rent, lease, utilities, return on investment, some labour cost, etc.
Think of revenue as of S, the selling price per unit, which consists of two components variable cost per unit VC and contribution margin CM.
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

22. Cost-Profit-Volume and Breakeven Analysis
VC per unit as portion of revenue per unit will be used to cover variable costs in your business. The second part of revenue per unit, called contribution margin, CM, is used to pay fixed costs of your business and to generate a profit
S = VC + CM,
 CM = S – VC (10.12)
Contribution margin is a difference between revenue and variable costs.
This difference goes first of all to pay off total fixed costs (FC), and once they are covered, starts to accumulate in profit
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.

23. Cost-Profit-Volume and Breakeven Analysis
The more you sell after the break-even point, the more profit you will make. X b/e is the number of units, which is necessary to sell to achieve the break-even point or in other words to cover total fixed costs.
To calculate this number X b/e we divide total fixed costs FC by contribution margin per unit CM.
X b/e = ­ FC (10.13) CM
Contribution margin may be expressed as a rate or as a percentage of the unit selling price. In this case it is called the Contribution Rate (CR):
CR = CM · 100% (10.15) S
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24. Cost-Profit-Volume and Breakeven Analysis
Net Income = Total contribution Margin - Total Fixed Costs collected from sales Or
NI = (CM)·X – FC, (10.14)
Where NI – net income (operating profit) from the
period
X – Total number of units sold for the period
FX – Total Fixed Costs
Copyright © 2005 McGraw-Hill Ryerson Limited, a Subsidiary of The McGraw-Hill Companies. All rights reserved.