DEC

13

MARKUP,MARKDOWN AND MARKON

WHAT IS THIS ALL ABOUT?
         Understanding how inflation and deflation prices is crucial in any business
as well as to the customer. These things are what we call markup, markdown and
mark on.

            We can use this learning as we discuss each and apply it in our daily lives.
Like for example, if we are in a business posting markdowns for sale and markups
for profit on your reselling. These are the applications that we must know and this
reading will help you how.

TOPIC’S RESEARCH
GROSS PROFIT MARGIN AND MARKUP: Figuring out when
you're making a profit is key to business success

One of the most important financial concepts you will need to learn in running
your new business is the computation of gross profit. And the tool that you use to
maintain gross profit is markup. The gross profit on a product sold is computed as:

Sales - Cost of Goods Sold = Gross Profit

To understand gross profit, it is important to know the distinction between

variable and fixed costs. Variable costs are those that change based on the
amount of product being made and are incurred as a direct result of producing
the product. Variable cost include: Materials used, Direct
labor, Packaging, Freight, Plant supervisor salaries, Utilities for a plant or
warehouse. Depreciation expense on production equipment and machinery, fixed
costs generally are more static in nature. They include: Office expenses such as
supplies, utilities and a telephone for the office , Salaries and wages of office staff,
salespeople and officers and owners, Payroll taxes and employee
benefits, Advertising, promotional and other sales expenses, Insurance, Auto
expenses for salespeople, Professional fees and rent.

How you use markup to set prices will depend on the type of business you are
starting. If you are launching a manufacturing, wholesale or retail operation, you
will be able to compute markup using the above formulas to factor in all the
variables in the cost of producing or generating the items you will be selling.
Markup can also be used to bid one job or to set prices for an entire product line.

If you are starting a service business, however, markup is more difficult to

calculate, particularly for new business owners. With most service businesses, the
key variable cost associated with delivering the service to your customers will be
you and your employees' time. In computing proper markup for a service
business, you must pay close attention to the time spent to provide the service to
customers, as well as to market prices of the services provided. In starting a
service business, you will need to research the going rate paid to employees and
the market prices for the services you will be providing.

For instance, if you are starting a temporary help agency, you will need to know
what rate is typically paid to employees in this industry, as well as the market rate
charged to your customers for temporary labor. This will enable you to compute
the proper markup in setting your price to ensure that you will be profitable.

MARKUP
Markup is the amount that a seller of goods or services charges over and
above the total cost of delivering its product or service in order to make a desired
profit. For entrepreneurs in the process of starting a business, establishing
markup is one of the most important parts of pricing strategy. Markups must be
sizable enough to cover all anticipated business expenses and reductions
(markdowns, stock shortages, employee and customer discounts) and still provide
the business with a good profit. The informed small business owner, then, is far
more likely to arrive at a good markup price than the business owner who has a
flawed understanding of the company's likely sales, its total operating expenses—
including material, labor, and overhead costs—and its place in larger economic
trends. Markups vary enormously from industry to industry. In some industries,
the markup is only a small percentage of the total cost of the product or
service. Companies in other industries, however, are able to attach a far
higher markup. Small appliance manufacturers can sometimes assign
markups of 30 percent or more, while clothing is often marked up by as much
as 100 percent. Even within industries, markups can vary widely. The
automotive industry, for example, is usually limited to a 5-10 percent markup
on new cars, but it realizes a far higher profit in the hugely popular sports
utility vehicle market, where markups of 25 percent or more are not
uncommon.

MARKDOWN
Markups vary enormously from industry to industry. In some industries, the
markup is only a small percentage of the total cost of the product or service.
Companies in other industries, however, are able to attach a far higher
markup. Small appliance manufacturers can sometimes assign markups of 30
percent or more, while clothing is often marked up by as much as 100
percent. Even within industries, markups can vary widely. The automotive
industry, for example, is usually limited to a 5-10 percent markup on new cars,
but it realizes a far higher profit in the hugely popular sports utility vehicle
market, where markups of 25 percent or more are not uncommon.

      There are steps to calculate a series of markdowns and markups, which is

often how business actually operates.  An item is on sale, off sale, the price
increases due to increased store labor costs, a new competitor opens and prices
must be marked down.  If you're interested in retailing (operating or working in a
retail store), there's an excellent website that provides a guide to how to price the
products in your store.
 SAMPLE PROBLEMS FOR LEARNING
1. If a wallet sells for Php30 and has a markup of Php18, what is the cost of the item?
Find: Cost
Solution: selling price – markup = cost
                               X= P30 - P18
                    X= P12
Answer: Cost of wallet is Php12

2. Jenny buys a bike for Php12 and sells it in “The Bazaar” for Php18.  Find the percent of
markup based on cost.

Find: Rate of Markup

Solution: Rate of Markup= Markup divided by cost

                 X= 6/12
                 X= 0.5

Answer:  percent of markup is 50%

3.    Pamela’s cupcakes cost Php10 a box.  If the cupcakes is sold for Php16, what is the
percent of markup based on cost?
Find: Rate of Markup
Solution: Rate of Markup= Markup divided by cost
               x= 6/10
               x= 0.6 or 60%
Answer: percent of markup is 60%

  4. What is the selling price for a cassette that costs the retailer Php10.00 and is marked up 70% based
on cost?
    
 Find: Selling price
      Solution: Rate of selling price = rate of cost + rate of markup
                        Selling price = Rate of selling price x cost
                        X= 0.7 x P10
                          = 7 + 10
      Answer: selling price is Php17

5. Find the cost of pants which has been marked up Php9 and has a markup rate of 80%.
    
Find: Cost
     Solution: cost = Markup divided by Markup rate
                             X = 9 / 0.8
      Answer =  The cost is Php11.25

6. A computer software retailer used a markup rate of 40%. Find the selling        
   price of a computer game that cost the retailer Php 250.

Solution: markup = (percentage)(cost)selling price = markup + cost

 =(0.40)(250) = Php 100
=250+10 = Php 350
Answer: Php 350 is the selling price

      7. An expensive cropped top originally priced at Php 550 is marked 25% off.     
          What is the sale price?
Solution: markdown = (percentage)(cost)
     selling price = cost - markdown
     x = (0.25)(550)
               = Php 137.50
              550 - 137.50 = 412.50
Answer: Php 412.50 = sale price

8. A golf shop pays its wholesaler Php 4000 for a certain club, and then sells   
    it to a golfer for Php 5300. What is the markup rate?

Solution: 5300(selling price) - 4000 (original price)        

                 =1300markup(absolute)
                            let x = percentage
      1300 = (x)(40)
                            1300/4000 = 0.325
       x = 0.325
           Answer: 32.5% = markup rate

        9. A Gibson guitar is marked down by 20%; the sale price is Php 28,000.   
           What was the original price?

      Solution: let x = original price

                x - 0.20x = 28000
               1x - 0.20x = 28000
               0.80x = 28000
               x = 28000/0.80
               = 35000
     Answer: Php 35,000 = original price

         10. An item from Bershka that regularly sells for Php 3000 a piece and
     sells it for Php 8100 for 3 items. What is the discount rate from the  
     original total cost?

     Solution: 3000 x 3 = 9000 (original total cost)

          8100 (discounted total cost)
                     9000 - 8100 = 900
                     let x = percentage
                     900 = (x)(9000)
          x = 900/9000
                                 x = 0.10
     Answer: 10% = markdown rate

11.  A retail shop post a sale for 20% in all items. Find the sale price of the         
      shop's graphic shirt that costs Php 350?

      Solution: (0.20)(350) = 70350 - 70 = 280

      Answer: Php 280 = sale price
 12. A collectible item that originally priced at Php 18,500 was sold for Ph 12,000 due to
damage. Find the markdown rate.

     Solution: 18500 - 12000 = 6500

                      let x = percentage
                      6500 = (x)18500
                      x = 6500/18500
                      x = 0.3513513
     Answer: 35.1% or 35% = markdown rate

13. The shop's overall sales for 2014 was Php 2,500,000 and flunk by     15% this year. What is the
overall sales for this year?

     Solution: (0.15)(2500000) = 375000

                     2500000 - 375000 = 2125000
     Answer: Php 2,125,000 = sales for this year

14. Bikna bought 3 items for H&M's 25% markdown sale. She bought a scarf with the original price
of Php 450, also a jacket pullover cost Php 1200, and a pair of boots was originally priced at Php
2500. Find the selling price of each purchased items.

     Solution: *Scarf's sale price

(0.25)(450) = 90
450 - 90 = 360
Php 360 = scarf's sale price
*Jacket pullover's sale price
(0.25)(1200) = 300
1200 - 300 = 900
Php 900 = Jacket pullover's sale price
*Boot's sale price
(0.25)(2500) = 625
2500 - 625 = 1875
      Answer: Php 1,875 = Boot's sale price

15.  An old book was marked down by 43% and sold for Php 20,000. How
      much was the original value of the book?

     Solution: let x = original price

x - 0.43x = 20000
1x - 0.43x = 20000
0.57x = 20000
x = 20000/0.57
x = 35087.719
     Answer: Php 35,087.71

16. Japan Home had a grand sale last week. With all their items priced a P88, how much would the
discounted price be if their items were all 30% off?

     Solution: markdown = (percentage)(cost)
selling price = cost - markdown
markdown = (0.3)(88)
= 26.4
 selling price = 88-26.4
= 61.6
     Answer: Php 61.6

17. An author released the last book of a trilogy he created. If bought   individually, the first book
would cost Php 230, the second book for  Php 370, and the last book for Php 400. The author then
decided  create a promo for those who want to buy the trilogy all at once. If the    author sold the
trilogy at Php 750, find:
A.) Total cost of all books if bought individually
B.) Discount acquired if the trilogy was bought

A.) Solution
book a + book b + book c = total cost of all books
230 + 370 + 400 = 1000
Answer: Php 1000
B.) Solution
markdown = cost - selling price
markdown rate = (markdown / cost) (100)
1000 - 750 = 250
250/1000 = .25
0.25 x 100 = 25
Answer: 25%

18. A man bought a set of original jewelry for Php 287,000. The value of
                 the jewelry set increases by 40% per annum. A year after, the man       
                 decides to sell the jewelry due to financial reasons. How much can he
                 sell the jewelry set?

Solution: mark up = (cost)(percentage)
                                      selling price = cost + mark up
mark up = (287,000)(0.4)
= 114,800
selling price = 287,000 + 114,800
= 401,800
Answer: Php 401,800

19. A benefit concert will be held during Christmas Eve for the benefit of
      the victims of the Lumad killings. The early bird ticket will be priced at  
      Php 200 for both adults and children. The organizers decided that the
      door charge will increase by 30% for adults and 20% for children. How
     much are the new prices of both tickets per person combined?

Solution: mark up = (cost)(percentage)
                selling price = cost + mark up
                mark up for adults = (200)(.3)
                = 60
               mark up for children = (200)(0.2)
                            = 40
door charge for adults = 200 + 60
= 260
door charge for children = 200 + 40
= 240
door charge for one adult and one child = 240 + 260
= 500
Answer: Php 500

20. A bakery near UST has a daily closing time sale. All of their pastries   
      are being sold at 70% off. Supposed that Juan wants to buy a donut at
      Php 20 each, a cupcake at Php 50 each, and macarons at Php 150
      per box during closing time sale, how much will Juan pay?

Solution: markdown = (percentage)(cost)
                selling price = cost - markdown
     20 + 50 + 150 = 220
               (220)(0.7) = 154
                    220-154 = 66
 Answer: Php 66

21. It costs 32 cents to make a can of spam. The store is

       hoping to make a 42% profit on each can. If you were to go into the
       store with Php24.35. How many cans of spam can you buy?

        Solution: Selling= (cost × rate of mark up) + cost

      = (.32 × 4.20) + .32
     Selling= 1.34 + .32 = Php1.66
     = 24.35 ÷ 1.66 = 14.67 cans
                  Answer: = 14 cans

22. Sporting Goods Outlet buys skateboards from a supplier of Php56. What is the retail price of the
skateboards if the manager applies a 42% markup?

    Solution: 56× .42 = 23.52

56.00 + 23.52 = 79.52
               Answer: Php 79.52 is the retail amount.

23. You buy a pair of jeans that is 33% off the original price of Php55.
      What is the markdown rate or discount rate? = 33%
      What is the original price? = Php55
      What was the total markdown of the jeans? = 33% of Php55
33% - 55 = Php18.55 off
     What was the sale price?
=55.00 - 18.15 = Php36.85

Use the equation, Quantity(sale price) = Percent × Whole(original), to solve this problem.
Solution:  (100% - 33%) × 55
= 67% × 55
Answer:  Php36.85

24. The regular selling price of a recliner at Furniture Depot is Php175. The markdown rate is 28%.
What is the sale price?
     Sale price = Regular - Markdown rate
    Markdown = Regular Selling Price - Sale Price
   Markdown = Regular Selling Price × Markdown Rate
                       175 × .28 = Php49
                       175 - 49 = Php126

25. An item is marked down 20%. The sale price is Php143.49. What was  
      the original price?

Solution: Let x be original price

×-.2x = 143.49
.8x = 143.49
                      Answer: X = Php179.36

CONCLUSION
         Generally in markdowns, retailers prefer to sell products at regular prices
to avoid having to mark them down for sale. Reduced sale prices limit your profit
potential and cash flow on sales. Despite these financial concerns, there are
several advantages you can achieve by marking down product prices at the right
time. Some products simply don't appeal to the target audience in the way you
would like. Poor packaging or merchandising, uncertainty about benefits or too
many close substitutes can all get in the way of a new product breaking through
in the marketplace. By marking down products that have struggled to take off,
you invite your customers to try the products by minimizing their investment risk.
Customers may be more willing to take a shot if they notice the product is 20 to
30 percent off its original price.

            A major reason companies mark down items is to clear them out of the
store. At the end of the winter season a clothing store typically marks down
sweaters, jackets and other winter gear before the buying season ends. Even if
products aren't sold for profit, the retailer clears space and gets some cash for its
extra inventory. Clearing shelf space on older merchandise also allows for fresh
stock of newer products that will attract customers. Retailers also use markdowns
to get cash in hand. When businesses pay out cash to acquire inventory, they
have a cash outflow. When items are sold on schedule at a profitable price point,
the end result is a net cash inflow. Markdowns often mean you sell at a loss.
While retail consultant Ted Hurlbut points out you can avoid such losses with
better inventory planning, no retail buyer is perfect. Getting as much cash as you
can as inventory becomes dated minimizes the negative cash flow effects of over-
buying.

            While in marking up in business is also very good marketing strategy in

business. But too much expectation on this matter may cause a lot of
trouble. Marking up prices only to put the products on sale at a more reasonable
figure might be manipulation, but it also tends to work even if the customer
realizes the tactic. Because customers enjoy the perception of the discount, failing
to play the markup-markdown game can cause a retailer to lose business. J.C.
Penney, for example, notoriously had to resume the strategy in 2013 after
abandoning it briefly because switching to a true everyday low price model was so
detrimental to the bottom line. Promising that every customer would always get a
fair deal with no promotions may have seemed like a reasonable idea, but after a
reported 25 percent drop in sales over the next fiscal year, the CEO lost his job
and the company abandoned the strategy.

            The markup-markdown strategy isn’t as easy as it sounds. Determining

which merchandise should be discounted and the percentage off it takes to move
slow-moving items requires an analytic study of your sales data, not just a guess
of which numbers will move the needle. Discounting shoes might move them out
the door faster, but if your customers would otherwise pay a higher price, that
strategy may be counterproductive.