Chapter Eight

MARKUPS AND MARKDOWNS:

PERISHABLES AND BREAKEVEN ANALYSIS

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

8-2

LU 8-1: Markup Based on Cost (100%)

1. Calculate dollar markup and percent markup on cost.

2. Calculate selling price when you know cost and percent markup on cost.

3. Calculate cost when dollar markup at percent markup on cost are known.

4. Calculate cost when you know the selling price and percent markup on cost.

LEARNING UNIT OBJECTIVES

8-3

LEARNING UNIT OBJECTIVES

LU 8-2: Markup Based on Selling Price (100%)1. Calculate dollar markup and percent markup on selling

price.2. Calculate selling price when dollar markup and percent

markup on selling price are known.3. Calculate selling price when cost and percent markup

on selling price are known.4. Calculate cost when selling price and percent markup

on selling price are known.5. Convert from percent markup on cost to percent

markup on selling price, and vice versa.

1. Calculate markdowns; compare markdowns and markups.2. Price perishable items to cover spoilage loss.

LU 8-2: Markdowns and Perishables

8-4

LEARNING UNIT OBJECTIVES

LU 8-4: Breakeven Analysis

1. Calculating contribution margin (CM).2. Calculating a breakeven point (BE).

8-5

TERMINOLOGY

Selling Price - The price retailers charge customers.

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

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.

8-6

BASIC SELLING PRICE FORMULA

Assume Gap plans to sell hooded fleece jackets for $23 that cost them $18.

8-7

MARKUPS BASED ON COST (100%)

Cost + Markup = Selling price

100% 27.78% 127.78%

Dollar markup is the portion

Percent markup on cost is the rate

Cost is 100% - the Base

8-8

CALCULATING DOLLAR MARKUP AND PERCENT MARKUP ON COST

Gap buys fl eece 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

Percent markup on cost = Dollar markup Cost

Check Selling price = Cost + Markup

Cost (B) = Dollar markup Percent markup on cost

$5 .2778

$5 $18

$ 5 = $23 -- $18

23 = 18 + .2778($18)

$23 = $18 + $5

= 27.78% or .2778

= $18

8-9

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 + MS = $100 + .65($100)S = $100 + $65S = $165

Dollar MarkupSelling Price

8-10

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 profi t, 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 + .40(C) $50 = 1.40C 1.40 1.40

$35.71 = C

M = S - CM = $50 - $35.71M = $14.29

Calculate the cost:

Calculate the dollar markup:

8-11

MARKUPS BASED ON SELLING PRICE (100%)

Cost + Markup = Selling price

78.26% + 21.74% = 100%

Dollar ($) markup is the portion (P) Selling price is 100% - the

base (B)

Percent (%) markup on selling price is the rate (R)

8-12

CALCULATING DOLLAR MARKUP AND PERCENT MARKUP ON SELLING PRICE

The cost to Gap for a hooded fl eece 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

$ 5 = $23 -- $18

Percent markup on selling price = Dollar markup Selling price

Check Selling price = Cost + Markup

23 = 18 + .2174($23)$23 = $18 + $5

$5 =

$23 .2174

Selling price = Dollar markup Percent markup on SP

$5 = 21.74%

$23

8-13

CALCULATING SELLING PRICE WHEN YOU KNOW COST AND PERCENT

MARKUP ON SELLING PRICEMel’s Furniture bought a lamp for $100. To make Mel’s desired profi t, he needs a 65% markup on selling price. What are Mel’s selling price and dollar markup?

M = S -- CM = $285.71 -- $100M = $185.71

S = $100 + .65S- .65S - .65S .35S = $100 .35 .35

S = $285.71

S (Selling price) = C (Cost) + M (Markup)Calculate the selling price:

Calculate the dollar markup:

8-14

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 profi t, 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)$50 = C + .40($50)$50 = C + $20- 20 - $20$30 = C

Dollar Markup

8-15

CONVERSION

Formula for Converting Percent Markup on Cost to Percent Markup on Selling Price:

Percent markup on cost 1 + Percent markup on cost

.2778 = 21.74% 1 + .2778

Formula for Converting Percent Markup on Selling Price to Percent

Markup on Cost:

Percent markup on selling price 1 -- Percent markup on selling price

.2174 = 27.78% 1 -- .2174

8-16

MARKDOWNS

Sears marked down a $18.00 tool set to $10.80. What are the dollar markdown and the markdown percent?

$18.00 -- $10.80 = $7.20 markdown

Dollar markdown = $7.20 = 40%

Selling price (original) $18.00

Markdown percent = Dollar markdown Selling price (original)

Dollar markup = Original selling price – New selling price

Example:

8-17

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 = $42.00TS (Total Sales) = TC + TM (Total Markup)TS = $42 + .60($42)TS = $67.20

300 lbs X .05 = 15 lbs

$67.20 = $.24 285lbs

Selling price per pound

300lbs -- 15lbs

8-18

CALCULATING A CONTRIBUTION MARGIN (CM)

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

Contribution margin (CM) = Selling price (S) – Variable cost (VC)

Example:

8-19

CALCULATING A BREAKEVEN POINT (BE)

Jones Company produces pens. The company has a fi xed cost (FC) of $60,000. Each pen sells for $2.00 with a variable cost (VC) of $.80 per pen.

Breakeven point (BE) = Fixed costs (FC) Contribution margin (CM)

Breakeven point (BE) = $60,000 (FC) = 50,000 units $2.00 (S) - $.80 (VC)

Example: