Pricing Math-Chapter 27.pptx

(1)

(2)

Profit & Markup

• _{Are they the same?}

• _{Mark-up is the difference between sales revenue and the cost} of goods sold. This may also be called GROSS PROFIT.

• _{Profit is the amount left over from revenue after the costs of} the merchandise and expenses have been paid. This may also be called the NET PROFIT.

(3)

Profit & Markup Example

Income Statement

Sales Revenue $45, 000 100%

Cost of Goods Sold $30,000 66.6%

Gross Profit (Mark-up) $15, 000 33.3%

Less Expenses $9,000 20%

Net Profit $6,000 10.3%

(4)

Basic Markup Calculations

• _{Retail price is a combination of cost and markup}

Cost + Markup = Retail Price

Knowing that you can infer that:

Retail price – markup = costs

AND

(5)

Percentage Markup

• _{In most business situations markup is expressed as a} percentage

• When using the percentage markup the markup can be computed based on either cost or retail price.

• Most chose to base markup on retail price

• _Because..

• It sounds like a smaller amount

• Sounds better to customer who know the markup percentage

• _{Makes prices seem reasonable}

• Future markdowns are calculated on a retail basis

(6)

Percentage Markup

Here are the steps to calculating percentage markup (on retail)

1. Determine Dollar Markup:

retail price – cost = markup($)

2. To change dollar to percentage divide by retail price:

markup($)/retail price = markup(% on retail)

3. Covert the decimal to a percentage

move the decimal two places to the right.

(7)

Markup Equivalents Table

• _{There is a correlation between markup percentage based on} retail and markup percentage based on cost.

(8)

Cost Method of Pricing

• _{Used when marketers know only the cost of an item and its} markup on cost.

To find the retail price, use the following steps:

1. Determine the dollar markup on cost:

Cost x markup % = markup $

2. Add the dollar markup to the cost to get the retail price

cost + markup$ = retail price

**You cannot use the markup on retail to do this calculation! • _{BUT you can look up the markup on retail on the Markup}

(9)

Retail Method of Pricing

• _{Used to compute the retail price when all you know are the} cost and the markup on retail.

Calculate using the steps below:

1. Determine what percentage of retail price is equal to cost

Retail price % - markup % = cost %

2. To determine retail price divide the cost by the decimal equivalent of percentage from step one.

price / cost % (as a decimal)

3. Calculate the dollar markup

Retail price – cost = markup $

4. Check your work

(10)

Calculations for lowering prices

• _{When a business lowers its prices, a new sales price must be} calculated, as well as a new markup

• _Markdowns:

• May need to be done to reduce the quanitity of goods

• Merchandise is typically marked down by a certain percentage

• Reductions are based on retail price

• Steps:

1.Determine the dollar markdown multiply the retail price by the % markdown:

retail price x markdown % = markdown $

2. To determine the sale price subtract markdown dollar from retail price:

(11)

Markdowns – Method 2

• _{There is a second method that can be used to calculate a} markdown

• Follow the steps below:

1. Determine the percentage of the original price will equal the sale price:

Retail Price % - Mark Down % = Sale Price %

2. Multiply the retail price by the sale price %

(12)

Maintained Markup

• _{The difference between an item’s final sale price and its cost}

• _{Businesses must plan for markdowns, doing so is part of being profitable}

and competitive.

• _{How to calculate the maintained markup} 1. Calculate the new sale price:

retail price % - markdown % = sales price %

2. Determine the maintained markup in dollars, subtract the cost from the sale price:

Sales price – cost = markup $

3. Determine the maintained markup percentage, divide the maintained markup in dollars by the sale price

(13)

Discounts

• Price adjustments often taken by employees for purchases and offered by vendors to their customers.

• Retailers may offer discounts to employees

• _{Job benefit}

• _{Encourage employees to purchase their goods} • _{Vendors my offer discounts}

• _{Encourage prompt payment} • _{Stimulate business}

• _{Employee Discounts}

• _{Discounts offered to employers to their workers}

• _{Encourage employees to buy and use their company’s products} • _{Encourages confidence and knowledge of and enthusiasm for}

products (especially in sales)

(14)

Calculating a Discount

(method 1)

Use the following steps:

1. Multiply the price by the discount percentage to get the discount dollars.

price x discount % = discount $

2. Subtract the discount from the price to get the net price (amount customer will really pay)

(15)

Calculating a Discount

(method 2)

When you want to know the net amount due use the following steps:

1. Subtract the discount percent from 100% to fine out the net price percentage equivalent

100% - discount % = net price percentage equivalent

2. Multiply the original price by that net prices equivalent percentage to get the net price

(16)

Discounts from Vendors

• _{Discounts include}

• Cash

• Trade

• _Quantity • Seasonal

(17)

Cash Discounts

• _{A discount offered to buyers to encourage them to pay their} bills quickly.

Calculating a cash discount:

1. Determine the dollar sales

Price x discount % = discount $

2. Determine the net price

(18)

Trade Discounts

• Not really discounts but the way manufactures quote prices to wholesalers and retailers.

• _{Called trade prices because different prices are offered to different}

lines of trades

• _{Ex: retailers may get a 40% discount while wholesalers get a 20%}

discount

• _{How to calculate:}

1. Determine the first dollar discount

price x discount % - discount $

2. Determine the declining balance

Price - discount $ = declining balances

3. Take the second discount of the declining balance

Declining balance x discount % = discount $

4. Determine the net price

(19)

Quantity Discounts

• _{Offered to buyers for placing large orders}

• _{Meant to encourage customers to buy in bulk and possibly} purchase more items than they intended to purchase

• _{May be quoted as a percentage or price or a s a part of a} quantitiy list.

Quantity list:

To calculate take the number of items purchased x the unit price

# of items 1-24 25-48 49-72

(20)

Quantity Discounts

• _{Cumulative quantity discounts – minimum purchase must be} made over a certain period of time.

• Example: If you spend $3,000 over a six month period you get a 2% discount.

(21)

Promotional Disocunts

• _{Given to business that agree to advertise or in some other way} promote a manufacturer’s products.

• Can be quoted as a percentage or a dollar amount

• when promo discount is quoted as a percentage use the cumulative discount method to calculate

• To calculate when discount is quoted as a dollar amount

1. Divide the dollar discount by the original price.

1. Dollar discount / price = discount %

2. Change the decimal to a percentage

(22)

Seasonal Discounts

• _{Sellers offer seasonal discounts to encourage buyers to} purchase goods long before the actual consumer buying season.

• _{Example – retailers may get a discount if they purchase beach}

towels by January 28th_.