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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