Marketing Essentials
n Chapter 27 Pricing Math
Section 27.1 Calculating Prices
Chapter 27 n Pricing Math
1
SECTION 27.1
Calculating Prices
What You'll Learn
 How a firm's net profit or loss is related
to pricing
 How to calculate dollar and percentage
markup based on cost or retail
 How to calculate markdown in dollars,
and how to determine sale price and
maintained markup
Chapter 27 n Pricing Math
2
SECTION 27.1
Calculating Prices
Why It's Important
Now that you understand the principles of
pricing, it is time to learn how to calculate
prices. Wholesalers and retailers, as well as
manufacturers and service businesses, need to
perform mathematical calculations to determine
the prices they will charge their customers.
You learned earlier that pricing is related to a
company's profitability; now you will learn how
they are related.
Chapter 27 n Pricing Math
3
SECTION 27.1
Calculating Prices
Key Terms
 gross profit
 maintained markup
Chapter 27 n Pricing Math
4
SECTION 27.1
Calculating Prices
Profit vs. Markup
A business’s profit is not the same as its
markup. Markup is the difference between the
cost of an item and the retail price. Profit is
what’s left over after all other expenses have
been paid.
Chapter 27 n Pricing Math
5
SECTION 27.1
Calculating Prices
Basic Markup Calculations
Retailers and wholesalers use the same formulas
to calculate markup. The most basic pricing
formula is the one for calculating retail price:
 Cost (C) + markup (MU) = retail price (RP)
Two other formulas can be derived from
this formula:
 Retail price (RP) – markup (MU) = cost (C)
 Retail price (RP) – cost (C) = markup (MU)
Chapter 27 n Pricing Math
6
SECTION 27.1
Calculating Prices
Percentage Markup
In most business situations, the markup figure is
expressed as a percentage MU(%), rather than
a dollar figure MU($).
Most sellers compute markup based on retail
price rather than cost because:
 the markup on retail sounds smaller
 future markdowns are calculated on retail
 profits are calculated on sales revenue
Chapter 27 n Pricing Math
7
SECTION 27.1
Calculating Prices
Markup Equivalents Table
The markup equivalents table lists markup
percentages based on retail and the
equivalent percentages based on cost.
To use the table, you locate the percentage
markup on retail and read its markup on cost
equivalent in the adjacent column or vice
versa. The table allows users to quickly
convert markups on retail to markups on
cost and vice versa.
Chapter 27 n Pricing Math
8
SECTION 27.1
Calculating Prices
Cost Method of Pricing
Sometimes marketers know only the cost of an
item and its markup on cost. In such a situation,
they use the cost method of pricing:
 Multiply the cost by the percentage markup
on cost in decimal form:
C x MU(%) = MU($)
 Add the dollar markup to the cost to get the
retail price:
C + MU($) = RP
Slide 1 of 2
Chapter 27 n Pricing Math
9
SECTION 27.1
Calculating Prices
Cost Method of Pricing
If you know the cost and the markup on retail, use
the markup equivalents table to convert markup
on retail to markup on cost, then calculate, using
the cost method of pricing:
 Multiply the cost by the percentage markup
on cost in decimal form:
C x MU(%) = MU($)
 Add the dollar markup to the cost to get the
retail price:
C + MU($) = RP
Slide 2 of 2
Chapter 27 n Pricing Math
10
SECTION 27.1
Calculating Prices
Typical Markup Percentage
Product Category
Typical Markup Percentage Based on Cost
Small Appliances (microwave, coffee maker)
30%
Large Appliances (refrigerator, dryer)
15%-20%
Automobiles
5-10%* (*note dealers make money on factor incentives and sale of accessories)
Automobile Accessories (sunroof, CD player)
15-20%
Clothing
100%
Markup percentages vary with the type of product and business. How
would you determine how much a microwave, whose retail price was
$159.99, cost when all you knew was the markup percentage based on
cost noted in the above table? What would be its cost in dollars?
Chapter 27 n Pricing Math
11
SECTION 27.1
Calculating Prices
Retail Method of Pricing
If you know only the cost and markup on retail, you can use
the retail method of pricing to compute the retail price.
 Determine what percentage of the retail price is the cost:
RP(%) - MU(%) = C(%) (retail price would be 100%)
 Determine the retail price by dividing the cost by the
decimal equivalent of the cost percentage:
C($) / C(%) = RP
 Calculate the dollar markup:
RP - C = MU($)
Chapter 27 n Pricing Math
12
SECTION 27.1
Calculating Prices
The Retail Box
$
%
$
%
Retail Price
M
J
100
Retail Price
M
11.25
J
100
Markup
N
K
Markup
N
4.50
K
40
Cost
O
L
Cost
O
6.75
L
6.0
To compute retail price
using the retail method, fill in
the boxes following the letter
sequence (J-O). Note that
the box labeled “J” (RP%) is
always 100%. The amounts
that go in the boxes labeled
K (MU%) and O (C$) are
usually known. Why is this
retail box an example of the
retail method for calculating
markup?
Chapter 27 n Pricing Math
13
SECTION 27.1
Calculating Prices
Calculations for Lowering Prices
When a business lowers its prices, a new sale
price must be calculated, as well as a new markup.
To calculate a markdown, determine the markdown
percentage on retail. Then:
 Determine the dollar markdown by multiplying the
retail price by the percentage markdown:
RP x MD(%) = MD($)
 Subtract the dollar markdown from the retail price
to get the sale price:
RP - MD($) = SP
Slide 1 of 2
Chapter 27 n Pricing Math
14
SECTION 27.1
Calculating Prices
Calculations for Lowering Prices
There is another, simpler way to calculate the sale
price:
 Subtract the markdown percentage from
100% (representing retail price):
RP(%) - MD(%) = SP (%) (RP = 100%)
 Multiply the retail price by the decimal
equivalent of the percentage sale price:
RP x SP(%) = SP($)
Slide 2 of 2
Chapter 27 n Pricing Math
15
SECTION 27.1
Calculating Prices
Maintained Markup
When a marketer marks down goods, the markup
and markup percentage change. The difference
between an item's final sale price, and its cost is
called the maintained markup.
To determine the maintained markup:
 Calculate the new sale price:
RP(%) - MD(%) = SP (%)
RP x SP(%) = SP($)
Slide 1 of 2
continued
Chapter 27 n Pricing Math
16
SECTION 27.1
Calculating Prices
Maintained Markup
continued
 Subtract the cost from the sale price to
determine maintained markup (MM($)):
SP - C = MM($)
 Divide the maintained markup in dollars
by the sale price to determine the
maintained percentage:
MM($) / SP = MM(%)
Slide 2 of 2
Chapter 27 n Pricing Math
17
27.1 ASSESSMENT
Reviewing Key Terms and Concepts
1. Explain how a firm's net profit or loss is related
to pricing.
2. How are the dollar and percentage markups
based on cost and based on retail calculated?
Illustrate the formulas for a book that costs
$13.99 and has a retail price is $19.99.
3. Assume that an item that cost $125 and
currently retails for $279.99 (RP) is going to be
marked down 40 percent for a special sale.
Calculate the new sale price, as well as the
maintained markup in dollars and as a percent.
Chapter 27 n Pricing Math
18
27.1 ASSESSMENT
Thinking Critically
If a buyer wanted to buy goods that cost
$100 and the customary markup on retail
was 40 percent, what two methods could
the buyer use to calculate the retail price?
Explain.
Chapter 27 n Pricing Math
19
Marketing Essentials
End of Section 27.1
Chapter 27 n Pricing Math
20