copyright © 2008 pearson education canada5-1 chapter 5 trade discount, cash discount, markup, and...

Copyright © 2008 Pearson Education Canada 5-1

Chapter 5

Trade Discount, Cash Discount, Markup, and Markdown

Contemporary Business Mathematics With Canadian Applications

Eighth Edition S. A. Hummelbrunner/K. Suzanne Coombs

PowerPoint: D. Johnston


ObjectivesAfter completing chapter six, the student will

be able to:

• Solve trade discount problems.

• Calculate an equivalent rate of discount for a discount series.

• Apply three methods of cash discounting.

• Solve problems involving markup based on selling price or cost and markdown.


Merchandising Chain

As a product is purchased and sold along a chain, each merchandiser adds a markup above the cost of buying to the merchandise.


Terminology Used in the Merchandising Chain


Trade Discounts

• Facilitate establishment of price differentials for different groups of customers.

• Facilitate the communication of changes in prices.• Reduce the cost of making changes in prices in

published catalogues.• Stated as a percent of list price or MSRP.(Rate of

discount)• Subtracted from the list price to give the net price.


Trade Discount Formulas

Amount of = Rate of x List Discount Discount Price Net Price = List Price – Amount of Discount


Using Trade Discount Formulas

A product listed at a price of $95.00 is subjectto a trade discount of 30%.

Amount of discount = 0.30 x $95 = $ 28.50

Net Price = $95.00 – 28.50 = $66.50


Calculating the List Price

List Price = Amount of Discount Rate of Discount The value of a 20% discount is $25. Find the list price.

List price = $25 = $125.00 0.20


Finding the Rate of Discount

Rate of trade = Amount of Discount Discount List Price Find a rate of discount for a TV set listed at $280 less a discount of $50. Rate = $50 = 17.86% $280


Computing Net Price Using the Net Factor

d discount rate L list price Net price = (1-d)L Find the net price if the list price is $56 less 18%. Net price = (1-.18)x$56 = .82x$56 = $45.92 Note: If you get a discount of 18%, you end up paying 82% of the list price.


Discount Series

• List price may be subject to two or more discounts.

• Additional discounts are offered to encourage large volume orders and early orders for seasonal items.

• Additional discounts may be offered to different members of the merchandising chain.


Discount Series

Net Price = (1-d1)(1-d2)(1-d3)…(1-dn)L

An item listed at $160 is subject to the trade discount series 5%, 15%, and 20%. Net Price = (1-.05)(1-.15)(1-.20)$160 = (.95)(.85)(.80)$160 = $103.36


Another Approach to Discount Series

List price $160.00Less 5% discount 8.00Net price after firstdiscount

152.00

Less 15% discount 22.80Net price after seconddiscount

129.20

Less 20% discount 25.84Net price after thirddiscount

$103.36


Single Equivalent Rates of Discount (Method 1)

A manufacturer sells a big screen TV for $998less 30%, 10%, 20%.

Net price = (1-.3)(1-.1)(1-.2)$998 = $502.99

Discount = List price – Net price = $998 – 502.99= $495.01Rate of Discount = $495.01 = 49.6% 998


Single Equivalent Rate of Discount (Method 2)

A manufacturer sells a big screen TV for $998less 30%, 10%, 20%.

Net price = (1-.3)(1-.1)(1-.2)$998 = 0.504 ($998) = $502.99You pay only 50.4% of the list price. Thepercent you do not pay is 1 – 0.504 = 49.6%.

Caution: In calculating the singleequivalent discount, do not sum individualdiscounts.


Formula for Single Equivalent Rate of Discount

• For every discount series, a single equivalent rate of discount exists.

• Eq. Disc. = 1- (1-d1)(1-d2)(1-d3)…(1-dn)L


Cash DiscountReduction to encourage prompt payment

• Rate of discount - percent of net amount after trade discounts have been taken

• Discount period - time period during which cash discount applies

• Credit period - time period during which invoice must be paid


Interpretation ofPayment Terms


Methods for Offering Cash Discounts

• Ordinary Dating

• End of Month (E.O.M.) - proximo

• Receipt of Goods (R.O.G.)


Ordinary DatingStart counting the days in the discount period from the date on the invoice. An invoice for $350 with a date of June 10 and terms of payment 2/10, n/30 has been received. The bill is paid on June 15. Find the amount paid. Since June 15 falls within the discount period, a discount of $7.00 can be taken ($350 x 0.02) The amount paid is $350 - $7 = $343.


End-of-Month or Proximo

Start counting the number of days in the discount period from the end of the month of the date on the invoice.

An invoice for $400 and dated May 10 with terms 3/10 E.O.M. is received. The bill is paid on June 5. Find the amount paid. Start counting from the end of May. June 5 falls within the discount period. The discount is $400 x .03


Receipt of Goods (R.O.G.)Start counting the number of days in the discount period from the date the goods are received instead of the invoice date. An invoice for $500 with terms 2/10 , n/30 R.O.G. is dated on June 10. The good are received on June 18. The bill is paid on June 25. Find the amount paid.

June 25 falls within 10 days of June 18. The 2% discount applies. The amount of the discount is $500 x .02 = $10. $490 is paid.


Partial PaymentA partial payment of $100 is made on May 9 on an invoice for $10,000 with terms 2/10, n/30. The invoice date is May 1. The payment date falls within the discount period. Thus credit should be given for the $100 partial payment. (1-.02) x Amount given credit for = $100. Amount given credit for = $100/.98 =$102.04


Markup

Selling Price = Cost of Buying

+ Expenses + Profit

S = C + E + P

Markup = Expenses M = E + P

+ Profit

Selling Price = Cost + S = C + M

Markup


Rate of Markup

Markup MRateofMarkupBasedonCost

Cost C

PrPr

Markup MRateofMarkup Based on Selling ice

Selling ice S


Finding the Rate of Markup

The cost of an electronic gadget to the retailer is $50. The gadget can be sold for $80. Markup = $80 – 50 = $30 Markup based on cost = 30 = 60% 50 Markup based on selling price = 30 = 37.5% 80


Finding the Selling Price

Selling Price = Cost + Markup = C + MFind the selling price of an item costing $52 ifthe markup is 40 % of cost.S = 52 + .40(52) = 52 + 20.8 = 72.8

Find the selling price of an item costing $52 ifthe markup is 40% of the selling price.S = 52 + .40S S - .40S = 52.60S = 52 S = 52/.60 = 86.67


Markdown

• Reduction in price of article sold to customer.

• Stated as a percent of the price to be reduced.

• Computed as if it were a discount.


Markdowns

Sale Price = Regular Selling Price - Markdown

A bicycle originally priced at $179 was sold for $129. Amount of discount = $179 – 129 = $50

Rate of markdown = 50 = 27.93% 179


Summary• Trade discounts facilitate the pricing of

goods along the merchandising chain from the manufacturer to the consumer.

• Cash discounts are price reductions which encourage prompt payment of invoices.

• Markups allow the retailer to set a price to cover cost, expenses, and profit.

copyright © 2008 pearson education canada5-1 chapter 5 trade discount, cash discount, markup, and...

Documents

pearson education canada5

rate of discount slide

johnston slide

list price slide

trade discount formulas

trade discount problems

discount series list

merchandising chain