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

2. Learning objectives Markups 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.

3. Learning objectives Markup Based on Selling Price (100%)
Calculate dollar markup and percent markup on selling price.
Calculate selling price when dollar markup and percent markup on selling price are known.
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 cost to percent markup on selling price, and vice versa.
Markdowns and Perishables
Calculate markdowns; compare markdowns and markups.
Price perishable items to cover spoilage loss.

4. Learning objectives Breakeven Analysis Calculate contribution margin.
Calculate breakeven point.

5. 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).

6. Markup pricing
Mark-up pricing 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 ten to discuss mark-up in terms of its percentage of the retail price – in this example, 18 per cent (40c/N$2.20). The difference between the retailer’s cost and the selling price (40c) is the gross margin.

7. 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.

8. 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

9. 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

10. 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:

11. 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

12. 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
233.3
70.0
680
272
150.0
60.0
750
375
100.0
50.0
2800
1680
66.7
40.0
3600
2700
33.3
25.0
4200
3360
20.0
5800
5220
11.1
10.0
6250
5938
5.3
5.0
10000
0.0

13. 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.

14. Markups Based on Cost (100%)
Cost Markup = Selling price
100% % %
Cost is 100% - the Base
Dollar markup is the portion
Percent markup on cost is the rate

15. 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 = $ $18
Percent markup on cost = Dollar markup
Cost $5
$18
= % or .2778
Cost (B) = Dollar markup
Percent markup on cost $5
.2778
= $18
Check Selling price = Cost + Markup
$23 = $ ($18)
$23 = $18 + $5

16. 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)
S = $ $65
S = $165
Dollar Markup
Selling Price

17. 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 (C)
$50 = C
$ = C
Calculate the cost:
Calculate the dollar markup:
M = S C
M = $ $35.71
M = $14.29

18. 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% % = %

19. 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
$ = $ $18
Percent markup on selling price = Dollar markup
Selling price
$ = %
$23
Check
Selling price = Cost + Markup
23 = ($23)
$23 = $18 + $5
Selling price (B) = Dollar markup (P)
Percent markup on SP (R)
$ = $23
.2174

20. Compare markup on cost versus markup on selling price
Percent Markup Based on Selling Price
Percent Markup Based on Cost
$ = %
$23
$ = %
$18
Be careful to substitute the correct value – selling price or cost – into the denominator.

21. 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 = $ S
- .65S S
.35S = $100
S = $285.71
Calculate the dollar markup:
M = S C
M = $ $100
M = $185.71

22. 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)
$ = C ($50)
$ = C $20
- $ $20
$ = C
Dollar Markup

23. Markup based on cost versus markup based on selling price (Table 12.1)

24. Conversion
Formula for Converting Percent Markup on Cost to Percent Markup on Selling Price:
Percent markup on cost
1 + Percent markup on cost
= %
Formula for Converting Percent Markup on Selling Price to Percent Markup on Cost:
Percent markup on selling price
1 -- Percent markup on selling price
= %

25. 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 $ Calculate the dollar markdown and the markdown percent.
$ $10.80 = $7.20 markdown
Dollar markdown = $ = 40%
Selling price (original) $18.00

26. Pricing Perishable Items
Audrey’s Bake Shop baked 20 dozen bagels. 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)
TS = $24 + $14.40
TS = $38.40
Total dollar markup
Total selling price
20 dozen X .10 = 2 dozen
$ = $2.13 18
Selling price per dozen

27. 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

28. 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).