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Chapter 27 Pricing Math 2
SECTION 27.1SECTION 27.1
What You'll LearnWhat You'll Learn
Calculating PricesCalculating Prices
How a firm's net profit or loss is related to pricing
How to calculate dollar and percentage markup based on cost or retail
How to calculate markdown in dollars, and how to determine sale price and maintained markup
Chapter 27 Pricing Math 3
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
Why It's ImportantWhy It's Important
Now that you understand the principles of pricing, it is time to learn how to calculate prices. Wholesalers and retailers, as well as manufacturers and service businesses, need to perform mathematical calculations to determine the prices they will charge their customers.
You learned earlier that pricing is related to a company's profitability; now you will learn how they are related.
Chapter 27 Pricing Math 4
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
Key TermsKey Terms
gross profit
maintained markup
Chapter 27 Pricing Math 5
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
A business’s profit is not the same as its markup. Markup is the difference between the cost of an item and the retail price. Profit is what’s left over after all other expenses have been paid.
Profit vs. Markup
Chapter 27 Pricing Math 6
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
Basic Markup Calculations
Retailers and wholesalers use the same formulas to calculate markup. The most basic pricing formula is the one for calculating retail price:
Cost (C) + markup (MU) = retail price (RP)
Two other formulas can be derived from this formula:
Retail price (RP) – markup (MU) = cost (C)
Retail price (RP) – cost (C) = markup (MU)
Chapter 27 Pricing Math 7
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
Percentage Markup
In most business situations, the markup figure is expressed as a percentage MU(%), rather than a dollar figure MU($).
Most sellers compute markup based on retail price rather than cost because:
the markup on retail sounds smaller
future markdowns are calculated on retail
profits are calculated on sales revenue
Chapter 27 Pricing Math 8
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
The markup equivalents table lists markup percentages based on retail and the equivalent percentages based on cost. To use the table, you locate the percentage markup on retail and read its markup on cost equivalent in the adjacent column or vice versa. The table allows users to quickly convert markups on retail to markups on cost and vice versa.
Markup Equivalents Table
Chapter 27 Pricing Math 9
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
Sometimes marketers know only the cost of an item and its markup on cost. In such a situation, they use the cost method of pricing:
Multiply the cost by the percentage markup on cost in decimal form:
C x MU(%) = MU($) Add the dollar markup to the cost to get the
retail price:
C + MU($) = RP
Cost Method of Pricing
Slide 1 of 2
Chapter 27 Pricing Math 10
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
If you know the cost and the markup on retail, use the markup equivalents table to convert markup on retail to markup on cost, then calculate, using the cost method of pricing:
Multiply the cost by the percentage markup on cost in decimal form:
C x MU(%) = MU($) Add the dollar markup to the cost to get the
retail price:C + MU($) = RP
Cost Method of Pricing
Slide 2 of 2
Chapter 27 Pricing Math 11
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
Markup percentages vary with the type of product and business. How would you determine how much a microwave, whose retail price was $159.99, cost when all you knew was the markup percentage based on cost noted in the above table? What would be its cost in dollars?
Typical Markup Percentage
Product Category Typical Markup Percentage Based on Cost
Small Appliances (microwave, coffee maker)
Large Appliances (refrigerator, dryer)
Automobiles
Automobile Accessories (sunroof, CD player)
Clothing
30%
15%-20%
5-10%* (*note dealers make money on factor incentives and sale of accessories)
15-20%
100%
Chapter 27 Pricing Math 12
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
If you know only the cost and markup on retail, you can use the retail method of pricing to compute the retail price.
Determine what percentage of the retail price is the cost:
RP(%) - MU(%) = C(%) (retail price would be 100%)
Determine the retail price by dividing the cost by the decimal equivalent of the cost percentage:
C($) / C(%) = RP
Calculate the dollar markup:
RP - C = MU($)
Retail Method of Pricing
Chapter 27 Pricing Math 13
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
To compute retail price using the retail method, fill in the boxes following the letter sequence (J-O). Note that the box labeled “J” (RP%) is always 100%. The amounts that go in the boxes labeled K (MU%) and O (C$) are usually known. Why is this retail box an example of the retail method for calculating markup?
The Retail Box
$ % $ %
Retail Price M J Retail Price M J100 11.25 100
Markup N K Markup N K4.50 40
Cost O L Cost O L6.75 6.0
Chapter 27 Pricing Math 14
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
When a business lowers its prices, a new sale price must be calculated, as well as a new markup. To calculate a markdown, determine the markdown percentage on retail. Then:
Determine the dollar markdown by multiplying the retail price by the percentage markdown:
RP x MD(%) = MD($) Subtract the dollar markdown from the retail price
to get the sale price:
RP - MD($) = SP
Calculations for Lowering Prices
Slide 1 of 2
Chapter 27 Pricing Math 15
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
There is another, simpler way to calculate the sale price:
Subtract the markdown percentage from 100% (representing retail price):
RP(%) - MD(%) = SP (%) (RP = 100%)
Multiply the retail price by the decimal equivalent of the percentage sale price:
RP x SP(%) = SP($)
Calculations for Lowering Prices
Slide 2 of 2
Chapter 27 Pricing Math 16
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
When a marketer marks down goods, the markup and markup percentage change. The difference between an item's final sale price, and its cost is called the maintained markup.
To determine the maintained markup:
Calculate the new sale price:
RP(%) - MD(%) = SP (%)
RP x SP(%) = SP($) continued
Maintained Markup
Slide 1 of 2
Chapter 27 Pricing Math 17
SECTION 27.1SECTION 27.1 Calculating PricesCalculating Prices
Subtract the cost from the sale price to determine maintained markup (MM($)):
SP - C = MM($)
Divide the maintained markup in dollars by the sale price to determine the maintained percentage:
MM($) / SP = MM(%)
Maintained Markup
continued
Slide 2 of 2
Chapter 27 Pricing Math 18
27.1 ASSESSMENTASSESSMENT
Reviewing Key Terms and Concepts1. Explain how a firm's net profit or loss is related
to pricing.2. How are the dollar and percentage markups
based on cost and based on retail calculated? Illustrate the formulas for a book that costs $13.99 and has a retail price is $19.99.
3. Assume that an item that cost $125 and currently retails for $279.99 (RP) is going to be marked down 40 percent for a special sale. Calculate the new sale price, as well as the maintained markup in dollars and as a percent.
Chapter 27 Pricing Math 19
27.1 ASSESSMENTASSESSMENT
Thinking Critically
If a buyer wanted to buy goods that cost $100 and the customary markup on retail was 40 percent, what two methods could the buyer use to calculate the retail price? Explain.
Chapter 27 Pricing Math 20
SECTION 27.2SECTION 27.2
What You'll LearnWhat You'll Learn
Calculating DiscountsCalculating Discounts
The general procedure for figuring discounts
How to calculate various kinds of discounts
Chapter 27 Pricing Math 21
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
Why It's ImportantWhy It's Important
Discounts affect the final price a customer will pay. Therefore, it is essential that you learn how to calculate discounts and the net price payable.
Chapter 27 Pricing Math 22
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
Key TermsKey Terms
employee discounts
Chapter 27 Pricing Math 23
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
A discount is a reduction in the price of goods and services sold to customers. Calculating discounts involves two steps: Multiply the price (P) by the discount percentage
[D(%)] to get the dollar amount of the discount [D($)]:
P X D(%) = D($) Subtract the discount from the price to get the net
price (NP), or the amount that the customer will actually pay:
P – D($) = NP
Discounts
Chapter 27 Pricing Math 24
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
Employee Discounts
Businesses offer employee discounts to encourage workers to buy the products they sell or manufacture. Employees who buy and use their company's products project confidence in and enthusiasm about them. Employee discounts can range from 10 to 30 percent for entry-level employees and as high as 50 percent for top-level executives.
Chapter 27 Pricing Math 25
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
Discounts from Manufacturers and Distributors
Some common types of discounts offered by manufacturers and distributors are:
cash
trade
quantity
seasonal
promotional discounts
Chapter 27 Pricing Math 26
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
Cash Discounts
A cash discount is a discount offered to buyers to encourage them to pay their bills quickly. With the invoice terms 3/15, net 60, the first number (3) represents the percentage of the discount applicable to the invoice total (P).
Slide 1 of 2
Chapter 27 Pricing Math 27
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
To calculate the cash discount:
Determine the dollar discount:
P x D(%) = D($)
Determine the net price:
P - D($) = NP
To determine a cash discount on a unit price, do the same calculation, with P equaling the unit price.
Cash Discounts
Slide 2 of 2
Chapter 27 Pricing Math 28
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
Trade discounts are based on manufacturers' list prices. They are calculated in the same way as cash discounts:
Determine the dollar discount:
P x D(%) = D($)
Determine the net price:
P - D ($) = NP
Trade Discounts
Chapter 27 Pricing Math 29
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
Quantity discounts are offered to buyers for placing large orders. Quantity discounts may be quoted as either a percentage of price or as part of a quantity price list.
Quantity Discount
Slide 1 of 2
Chapter 27 Pricing Math 30
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
Using a quantity price list:
No. of items 1-24 25-48 49-72
Unit price $.95 $.90 $.85
If you purchased 50 items, you would pay $.85 each. Your total bill would be $42.50 ($.85 X 50).
A cumulative discount is quoted as a percentage and is calculated like a cash discount.
Quantity Discount
Slide 2 of 2
Chapter 27 Pricing Math 31
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
Promotional discounts are given to businesses that agree to advertise or promote a manufacturer's products. When the promotional discount is quoted as a percentage, it is calculated the same way as a cash discount. If a dollar discount is given, calculate the discount percentage this way:
Divide the dollar discount by the original price of the order:
D($) / P = D(%)
Promotional Discounts
Chapter 27 Pricing Math 32
SECTION 27.2SECTION 27.2
Calculating DiscountsCalculating Discounts
Sellers offer seasonal discounts to encourage buyers to purchase goods long before the actual consumer buying season. To calculate the net price with a seasonal discount offered as a percent:
Determine the dollar discount:P x D(%) = D($)
Determine the net price:P - D($) = NP
Seasonal Discounts
Chapter 27 Pricing Math 33
27.2 ASSESSMENTASSESSMENT
Reviewing Key Terms and Concepts
1. What procedures are used to calculate the dollar amount of a discount and the final selling price?
2. Carlo's Ice Cream Specialties gives all of its employees a 15 percent discount on ice cream cakes. What would an employee pay for a chocolate ice cream cake that is $13.75?
Chapter 27 Pricing Math 34
27.2 ASSESSMENTASSESSMENT
Thinking Critically
Assume you are given a trade discount of 30 percent and a seasonal discount of 10 percent. You also take advantage of a cash discount of 2 percent. Would you be entitled to a 42 percent discount? Explain.
Chapter 27 Pricing Math 35
27.2 Graphic OrganizerGraphic Organizer
Discounts from Manufacturers and Distributors
CashDiscountsCash
Discounts
Discounts fromDiscounts fromManufacturers and DistributorsManufacturers and Distributors
Discounts fromDiscounts fromManufacturers and DistributorsManufacturers and Distributors
PromotionalDiscounts
PromotionalDiscounts
TradeDiscountsTrade
Discounts
SeasonalDiscountsSeasonalDiscounts
QuantityDiscountsQuantityDiscounts