McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved

Chapter 8

Markups and Markdowns: Perishables and Breakeven

Analysis

8-2

• 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

Markups and Markdowns; Perishables and Breakeven Analysis#8#8Learning Unit ObjectivesMarkup Based on Cost (100%)LU8.1LU8.1

8-3

• 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 selling price to percent markup on cost and vice versa

#8#8Learning Unit ObjectivesMarkup Based on Selling Price (100%)LU8.2LU8.2

Markups and Markdowns; Perishables and Breakeven Analysis

8-4

• Calculate markdowns; compare markdowns and markups

• Price perishable items to cover spoilage loss

#8#8Learning Unit ObjectivesMarkdowns and PerishablesLU8.3LU8.3

Markups and Markdowns; Perishables and Breakeven Analysis

8-5

• Calculating Contribution Margin (CM)

• Calculating a Breakeven Point (BE)

#8#8Learning Unit ObjectivesBreakeven AnalysisLU8.4LU8.4

Markups and Markdowns; Perishables and Breakeven Analysis

8-6

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

8-7

Basic Selling Price Formula

Selling price (S) = Cost (C) + Markup (M)

$23Jean

$18 - Pricepaid to bring

Jeansinto store

$5 - Dollars to

cover operating

expenses and make a profit

8-8

Markups Based on Cost (100%)

Cost + Markup = Selling Price

100% 27.78% 127.78%

Cost is 100% - the Base

Dollar markup is the portion

Percent markup on

cost is the rate

8-9

Calculating Dollar Markup and Percent Markup on Cost

• Target buys Levi’s Jeans for $18. They plans to sell them for $23. What is Target’s markup? What is his percent markup on cost?

Dollar Markup = Selling Price - Cost

$ 5 = $23 - $18

Percent Markup on Cost = Dollar Markup Cost $5 = 27.78%$18

Check: Selling Price = Cost + Markup23 = 18 + .2778(18)

$23 = $18 + $5

Cost (B) = Dollar Markup Percent markup on cost

$5 = $18 .2778

8-10

Calculating Selling Price When You Know Cost and Percent Markup on Cost

• Ray’s Appliances bought a refrigerator for $100. To make desired profit, he needs a 65% markup on cost. What is Ray’s dollar markup? What is his selling price?

S = C + MS = $100 + .65($100)S = $100 + $65S = $165 Dollar Markup

8-11

Calculating Cost When You Know Selling Price and Percent Markup on Cost

• Jane’s imported flower business sells floral arrangements for $50. To make her desired profit, Jane needs a 40% markup on cost. What do the flower arrangements cost Jane? What is the dollar markup?

S = C + M$50 = C + .40(C)$50 = 1.40C1.40 1.40$35.71 = C

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

8-12

Markups Based on Selling Price (100%)

Cost + Markup = Selling Price

78.26% + 21.74% = 100%

Selling Price is 100% - the

Base (B)

Dollar ($) markup is the

portion (P)

Percent (%) markup on

selling price is the rate (R)

8-13

Calculating Dollar Markup and Percent Markup on Selling Price

• Target buys Levi’s Jeans for $18. They plans to sell them for $23. What is Target’s markup? What is his percent markup on selling price?

Dollar Markup = Selling Price - Cost

$ 5 = $23 - $18

Percent Markup on Selling Price = Dollar Markup Selling Price $5 = 21.74%$23

Check: Selling Price = Cost + Markup23 = 18 + .2174($23)

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

Selling Price = Dollar Markup Percent markup on SP

8-14

Calculating Selling Price When You Know Cost and Percent Markup on Selling Price

• Ray’s Appliances bought a refrigerator for $100. To make desired profit, he needs a 65% markup on selling price. What is Ray’s selling price and dollar markup?

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

S = C + MS = $100 + .65(S)-.65s - .65S .35s = $100.35 .35S = $285.71

8-15

Calculating Cost When You Know Selling Price and and Percent Markup on Selling Price

• Jane’s imported flower business sells floral arrangements for $50. To make her desired profit, Jane needs a 40% markup on selling price. What is the dollar markup? What do the flower arrangements cost Jane?

S = C + M$50 = C + .40($50)$50 = C + $20-20 - $20$30 = C

Dollar Markup

8-16

Conversion

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

Percent markup on selling price1- Percent markup on selling price

.2174 = 27.78% 1-.2174

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

8-17

Equivalent Markup

Percent markup on Percent markup on cost Selling Price (round to nearest tenth percent)

20 25.025 33.330 42.933 49.335 53.840 66.750 100.0

8-18

Markdowns

Sears marked down a $18 tool set to $10.80. What are the dollar markdown and the markdown

percent?$10.80

$7.20$18.00

40%

$18-$10.80Markdown

Markdown percent = Dollar markdown Selling price (original)

8-19

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 = 300lb. X $.14 = $42.00TS = TC + TMTS = $42 + .60($42)TS = $67.20

300 lbs. X .05 = 15lbs

$67.20 = $.24 285lbs.

300lbs. - 15lbs

Selling Price per pound

8-20

TerminologyVariable costs (VC) – Costs that do change in response

to changes in the sales

Fixed Cost (FC) – Costs that do not change with increases or decreases in

sales

Contribution Margin (CM) – The difference between selling

price (S) and variable costs (VC).

Breakeven Point (BE) – The point at which the seller has

covered all costs of a unit and has not made any profit or

suffered any loss.

Selling Price (S) – Price of goods

8-21

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)

8-22

Calculating a Breakeven Point (BE)

• Jones Company produces pens. The company has fixed 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 $2.00 (S) - $.80 (VC)

8-23

Problem 8-19:

Solution:

Dollar markup = S – C Percent markup on cost = = 50%

$5,000$10,000

$5,000 = $15,000 - $10,000

Check:

C = = = $10,000 Dollar markup . Percent markup on cost

$5,000 .50

8-24

Problem 8-21:

Solution:

$20 = C + .40C $20 1.40C1.40 1.40

=

Check:

Cost =

$14.29 =

Selling price _1 + Percent markup on cost

$201.40

8-25

Problem 8-24:

Solution:

a. (S) (C) (M)

$13.50 - $8.50 = $5.50 dollar markup

$5.50 (P) = 68.75%$8.00 (B)

8-26

Problem 8-25:

Solution:

$120 = C + .30($120)$120 = C + $36

-36 -36 $84 = C

Check:

C = Selling price x (1- Percent markup on selling price) $84 = $120 x .70

8-27

Problem 8-29:

Solution:Total cost = 100 x $2.00 = $200

Total selling price = TC + TM

TS = $200 + .60($200)

TS = $200 + $120

TS = $320

Selling price per cookie = = $3.56

(100 cookies – 10%)

$32090 cookies