1. Markups and Markdowns: Perishables and Breakeven Analysis
Chapter Eight
Markups and Markdowns: Perishables and Breakeven Analysis
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning unit objectives
LU 8-1: 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.

3. Learning unit objectives
LU 8-2: 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.
LU 8-2: Markdowns and Perishables
Calculate markdowns; compare markdowns and markups.
Price perishable items to cover spoilage loss.

4. Learning unit objectives
LU 8-4: Breakeven Analysis
Calculating contribution margin (CM).
Calculating a breakeven point (BE).

5. Terminology
Cost - The price retailers pay to a manufacturer or supplier.
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.

6. Basic Selling Price Formula
Assume Gap plans to sell hooded fleece jackets for $23 that cost them $18.

7. 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

8. 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

9. Calculating Selling Price When You Know Cost and Percent Markup on Cost
Mel’s Furniture bought a lamp for $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

10. 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

11. 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% % = %

12. 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 = Dollar markup
Percent markup on SP
$ = $23
.2174

13. Calculating Selling Price When You Know Cost and Percent Markup on Selling Price
Mel’s Furniture bought a lamp for $100. To make Mel’s desired profit, he needs a 65% markup on selling price. What are Mel’s selling price and 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

14. 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

15. 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
= %

16. Markdowns Markdown percent = Dollar markdown Selling price (original)
Dollar markup = Original selling price – New selling price
Example:
Sears marked down a $18.00 tool set to $ What are the dollar markdown and the markdown percent?
$ $10.80 = $7.20 markdown
Dollar markdown = $ = 40%
Selling price (original) $18.00

17. Pricing Perishable Items
Alvin’s vegetable stand grew 300 pounds of tomatoes. He expects 5% of the tomatoes to become spoiled and not salable. The tomatoes cost Alvin $.14 per pound and he wants a 60% markup on cost. What price per pound should Alvin charge for the tomatoes?
TC (Total Cost) = 300 lb. x $.14 = $42.00
TS (Total Sales) = TC TM (Total Markup)
TS = $ ($42)
TS = $67.20
300 lbs X .05 = 15 lbs
$ = $.24
285lbs
Selling price per pound
300lbs -- 15lbs

18. 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 and a variable cost (VC) of $.80. Calculate the contribution margin.
CM = $2,00 (S) -- $.80 (VC)
CM = $1.20

19. 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
$2.00 (S) - $.80 (VC)