MARKUP & MARKDOWN

DEFINITION

cost of goods sold The cost of the merchandise sold during an operating period. One of two major expense categories of a business.

operating expenses, or overhead All business expenses, other than cost of merchandise, required to operate a business, such as payroll, rent, utilities, and insurance.

DEFINITION

markup, markon, margin The amount added to

the cost of an item to cover the operating

expenses and profit. It is the difference

between the cost and the selling price.

retailing equation The selling price of an item is

equal to the cost plus the markup.

DEFINITION

The fundamental principle on which business operates is to sell

goods and services for a price high enough to cover all

expenses and provide the owners with a reasonable profit. The

formula that describes this principle is known as the retailing

equation. The equation states that the selling price of an item

is equal to the cost plus the markup.

Selling price = Cost + Markup

Using the abbreviations C for cost, M for markup, and SP for

selling price, the formula is written as

SP = C + M

To illustrate, if a camera costs a retailer $60 and a $50 markup

is added to cover operating expenses and profit, the selling

price of the camera would be $110.

$60 (cost) + $50 (markup) = $110 (selling price)

learned that equations are solved by isolating the

unknown on one side and the knowns on the other.

Using this theory, when the amount of markup is the

unknown, the equation can be rewritten as

Markup = Selling price - Cost or M = SP - C

When the cost is the unknown, the equation becomes

Cost = Selling price - Markup or C = SP - M

EXAMPLE

FINDING THE SELLING PRICE

Mementos Gift Shop pays $8.00 for a picture frame. If a markup of $6.50 is added, what is the selling price of the frame?

SOLUTION STRATEGY

Because selling price is the unknown variable, we use the formula SP = C + M as follows:

SP = C + M

SP = 8.00+ 6.50 = 14.50

Selling price = $14.50

EXERCISE

Ceramic planters cost the manufacturer $6.80

per unit to produce. If a markup of $9.40 each

is added to the cost, what is the selling price

per planter?

FINDING THE AMOUNT OF MARKUP

Office Mart buys printing calculators from Taiwan for $22.50

each. If they are sold for $39.95, what is the amount of the

markup?

Solution: Because the markup is the unknown variable, we use

the formula M = SP - C as follows:

M = SP - C

M = 39.95 - 22.50 = 17.45

Markup = $17.45

EXERCISE

Golfer’s Paradise sells a dozen golf balls for

$28.50. If the distributor was paid $16.75,

what is the amount of the markup?

FINDING THE COST

Safeway Supermarkets sell Corn Crunchies for $3.29 per box. If

the markup on this item is $2.12, how much did the store pay

for the cereal?

Solution: Because the cost is the unknown variable in this

problem, we use the formula C = SP - M.

C = SP - M

C = 3.29 - 2.12 = 1.17

Cost = $1.17

EXERCISE

For the following, use the basic retailing equation

to solve for the unknown.

After a wholesaler adds a markup of $75 to a

television set, it is sold to a retail store for $290.

What is the wholesaler’s cost?

MARKUP BASED ON COST

MARKUP BASED ON COST. When cost is 100%,

and the markup is expressed as a percent of

that cost.

When the markup is based on cost, the percent markup is the rate, the dollar amount of markup is the portion, and the cost, representing 100%, is the base. The answer will describe what percent the markup is of the cost; therefore, it is called percent markup based on cost. We use the formula:

MARKDOWN

DEFINITION

markdown A price reduction from the original

selling price of merchandise.

markdown cancellation Raising prices back to

the original selling price after a sale is over.

sale price The promotional price of

merchandise, after a markdown.

DETERMINING THE AMOUNT OF MARKDOWN AND

THE MARKDOWN PERCENT

A markdown is a reduction from the original

selling price of an item to a new sale price. To

determine the amount of a markdown, we use

the formula:

Markdown = Original selling price - Sale price

For example, if a sweater was originally marked at $89.95 and then was sale priced at $59.95, the amount of the markdown would be $30.00 ($89.95 $59.95 $30.00). To find the markdown percent, we use the percentage formula once again, Rate

Portion Base, where the markdown percent is the rate, the amount of the markdown is the portion, and the original selling price is the base:

Markdown

Markdown percent = --------------------------------------------

Original selling Price

DETERMINING THE MARKDOWN AND

MARKDOWN PERCENT

A picture frame that originally sold for $60 was

marked down and sold for $48. What is the

amount of the markdown and the markdown

percent?

EXERCISE

DETERMINING THE SALE PRICE AFTER A MARKDOWN

AND THE ORIGINAL PRICE BEFORE A MARKDOWN

In markdown calculations, the original selling price is the base, or 100%. After a markdown is subtracted from that price, the new price represents (100% Markdown percent) of the original price. For example, if a chair is marked down 30%, the sale price would be 70% (100% 30%) of the original price.

To find the new sale price after a markdown, we use the familiar percentage formula, Portion Rate Base, where the sale price is the portion, the original price is the base, and (100% Markdown percent) is the rate.

Sale price = Original selling price(100% - Markdown percent)

DETERMINING THE SALE PRICE

Fernando’s Hideaway, a men’s clothing store, originally sold a line of ties for $55 each. If the manager decides to mark them down 40 % for a clearance sale, what is the sale price of a tie?

Sulution strategy: Remember, if the markdown is 40%, the sale price must be 60% ( 100% - 40%) of the original price.

Sale price = Original selling price (100% - Markdown percent)

Sale price = $55(100% - 40%) = 55(.6) = 33

Sale price = $33

EXERCISE

Craftsman’s Village originally sold paneling for

$27.50 per sheet. When the stock was almost

depleted, the price was marked down 60% to

make room for incoming merchandise. What

was the sale price per sheet of paneling?

FINDING THE ORIGINAL PRICE BEFORE A

MARKDOWN

To find the original selling price before a markdown, we use the sale price formula solved for the original selling price. The original selling price is isolated to one side by dividing both sides of the equation by (100% Markdown percent). Note: This is actually the percentage formula Base Portion Rate, with the original selling price as the base.

FINDING THE ORIGINAL PRICE BEFORE A

MARKDOWN

Sale price

Original selling price = -------------------------------------------------

100% - Markdown percent

DETERMINING THE ORIGINAL SELLING PRICE

What was the original selling price of a backpack,

currently on sale for $99 after a 25% markdown?

Reasoning: $99 = 75% (100% - 25%) of the original

price. Solve for the original price.

COMPUTING THE FINAL SELLING PRICE AFTER

A SERIES OF MARKUPS AND MARKDOWNS

DEFINITION

staple goods Products, considered basic and routinely purchased, that do not undergo seasonal fluctuations in sales, such as food, tools, and furniture.

seasonal goods Products that undergo seasonal fluctuations in sales, such as fashion apparel and holiday merchandise.

COMPUTING A SERIES OF MARKUPS AND

MARKDOWNS In March, Swim and Sport purchased designer bathing suits for $50 each. The

original markup was 60% based on the selling price. In May, the shop took a 25%

markdown by having a sale. After three weeks, the sale was over and all merchandise

was marked up 15%. By July, many of the bathing suits were still in stock, so the

shop took a 30% markdown to stimulate sales. At the end of August, the balance

of the bathing suits were put on clearance sale, with a final markdown of another

25%. Compute the intermediate prices and the final selling price of the bathing suits.

Round to the nearest cent.

In September, Tire Depot in C hicago purchased snow tires from a distributor for $48.50 each. The original markup was 55% based on the selling price. In November, the tires were marked down 30% and put on sale. In December, they were marked up 20%. In February, the tires were again on sale at 30% off, and in March were cleared out with a final 25% markdown. What was the final selling price of the tires? Round to the nearest cent.

CALCULATING THE SELLING PRICE OF

PERISHABLE GOODS

Out-of-season merchandise still has some value, whereas perishable goods

(such as fruits, Out-of-season merchandise still has some value, whereas

perishable goods (such as fruits, vegetables, flowers, and dairy products) have

a certain shelf life and then no value at all. For sellers of this type of

merchandise to achieve their intended markups, the selling price must be

based on the quantity of products sold at the original price. The quantity sold is

calculated as total items less spoilage. For example, if a tomato vendor

anticipates a 20% spoilage rate, the selling price of the tomatoes should be

calculated based on 80% of the original stock. To calculate the selling price of

perishables, use the formula:

Total expected selling price

Selling price of perishables = -----------------------------------------------------------

Total quantity - Anticipated spoilage

CALCULATING THE SELLING PRICE OF

PERISHABLE GOODS

The Farmer’s Market buys 1,500 pounds of fresh peaches at a

cost of $.60 a pound. If a 15% spoilage rate is anticipated, at

what price per pound should the peaches be sold to achieve a

50% markup based on selling price? Round to the nearest

cent.

EXERCISE