Short Review of Channel Markup
Ted Mitchell
Markup in a Channel of Distribution
• Manufacturer
• Distributor
• Retailer
• Final Consumer pays the listed retail price
recommended by the Manufacturer
Markup on TOP of the Cost Compared
to
Markup on TOP of the Price
• Markup on Price
• Mp = (P-V)/P
(P-V)
Mp = ————
P
• Markup on Cost
• Mv = (P-V)/V
(P-V)
Mv = ————
V
Problem #1
• A retailer charges his customer the manufacturer’s
suggest list price of $120 per widget. His Discount Off
Suggested List Price or Markup on Price is 40%.
• What did it cost him to buy the widget from the
Distributor?
•
•
•
•
•
•
What is the definition of markup on price, Mp?
Mp = (P-V)/P
40% = ($120 –V)/$120
40%($120) – $120 = -V
$48 - $120 = -V
V = $120 – $48 = $72
Problem #1
• A retailer charges his customer the manufacturer’s
suggest list price of $120 per widget. His Discount Off
Suggested List Price or Markup on Price is 40%.
• What did it cost him to buy the widget from the
What was the selling
Distributor?
price on
theprice,
distributor
• What is the definition of markup
Mp?
charged the retailer?
• Mp = (P-V)/P
•
•
•
•
40% = ($120 –V)/$120
40%($120) – $120 = -V
$48 - $120 = -V
V = $120 – $48 = $72
Problem #2
• A retailer charges his final customer $120 per
widget. His Markup on Cost is 66.67%.
• What did it cost him to buy the widget from the
Distributor?
•
•
•
•
•
•
•
What is the definition of markup on cost, Mv?
Mv = (P-V)/V
66.67% = ($120 –V)/V
66.67%V = $120 – V
66.67%V + V = $120
V (0.6676 + 1) = $120
V = $120/1.6667 = $71.99 = $72
Problem #3
• A retailer charges a selling price that earns him a
fair and normal profit with a Markup on Cost is
66.67%.
• What is the Markup on Price?
• To Convert Mv to Mp
• Mv = 66.67/100
• Add the top part to the bottom part to calculate
the markup on price
• Mp = 66.67/166.67 = 0.40 = 40%
Problem #4
• A manufacturer makes a product that costs $21 per unit and
sells it to a distributor. The manufacturer charges a selling
price that earns him a fair and normal profit using a Markup
on Price of 30%. What is the Selling Price to the Distributor?
• What is the definition of markup on price?
• Mp = (P-V)/P
• 30% = (P-$21)/P
• 30%P = P-$21
• 30%P – P = -$21
• P(0.30-1) = -$21
• P = -$21/-0.70 = $30
Problem #4
• A manufacturer makes a product that costs $21 per unit. The
manufacturer charges his distributor a selling price that earns
him a fair and normal profit using a Markup on Price of 30%.
What is the his Selling Price to the Distributor?
Whaton
is the
cost per
• What is the definition of markup
price?
unit to the
• Mp = (P-V)/P
distributor?
• 30% = (P-$21)/P
• 30%P = P-$21
• 30%P – P = -$21
• P(0.30-1) = -$21
• P = -$21/-0.70 = $30
Problem #5
• A Distributor Buy a widget for $30 and sells to
a retailer for the wholesale price of $72.
• What is the Distributor’s dollar markup?
• Dollar markup = P-V
• Dollar markup = $72 - $30 = $42
Problem #6
• A manufacturer builds a product for a variable cost of
$20 each. The manufacturer sells the product with a
fair and normal 50% markup on price to a Distributor.
• The distributor sells the product to a retailer.
• The Retailer sells the product to the final consumer at a
selling price of $120 earns a 40% markup on price.
• What is the Distributor’s dollar markup?
• Dollar markup = Price to the retailer – cost from the
manufacturer
• Dollar markup = P-V
• Dollar markup = $72 - $30 = $42
• Markup is Like a Sales Commission
• If you sell something for a $100 and you get a
sales commission of 60%. How many dollars in
commission do you earn?
• The customer pays you $100 and you make
60% commission, then how much do you
have to pay the company?
• Price,P = $100
• Your Dollar profit, M = $60
• Your cost from the company P- M = V
• V = $100 - $60 = $40
• Your commission rate = (P-V)/P = Mp
• (P-V)/P= (100-60)/100 =60/100 = 60%
You are an independent sales person who works with several
different firms as a manufacturer’s agent selling their
products to your customers. One of you manufacturers
has offered you the opportunity to sell a new pump to
your customers. The manufacturer will bill you for $180
for every pump you sell and will ship the pump directly to
your customer. You need a 40% sales commission on this
type of product to stay in business. You must set the
selling price that the customer will pay you for the pump.
What selling price must you set for the pump if you must
make a 40% commission on the selling price?
(P-V)/P = Commission = Markup = Mp
P-V = Mp(P)
Substitute what we know
P - $180 = 40%P
P – 0.40P = $180
(1 – 0.40)P = $180
0.60P = $180
P = $180/0.60 = $300 is your selling price
V = $180
Your commission = 300-180 = $120
• Any Questions?