Chapter 8 Markups and Markdowns: Perishables and Breakeven Analysis McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved #8 Markups and Markdowns; Perishables and Breakeven Analysis Learning Unit Objectives LU8.1 8-2 Markup Based on Cost (100%) • 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 #8 Markups and Markdowns; Perishables and Breakeven Analysis Learning Unit Objectives LU8.2 Markup Based on Selling Price (100%) 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 Markups and Markdowns; Perishables and Breakeven Analysis Learning Unit Objectives LU8.3 Markdowns and Perishables 8-4 • Calculate markdowns; compare markdowns and markups • Price perishable items to cover spoilage loss #8 Markups and Markdowns; Perishables and Breakeven Analysis Learning Unit Objectives LU8.4 Breakeven Analysis 8-5 • Calculating Contribution Margin (CM) • Calculating a Breakeven Point (BE) Terminology 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 Selling Price - The price retailers charge customers 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 8-6 Basic Selling Price Formula Selling price (S) = Cost (C) + Markup (M) $23 Jean 8-7 $18 - Price paid to bring Jeans into store $5 - Dollars to cover operating expenses and make a profit Markups Based on Cost (100%) Dollar markup is the portion Cost + Markup = Selling Price 100% Cost is 100% - the Base 8-8 27.78% 127.78% Percent markup on cost is the rate Calculating Dollar Markup and Percent Markup on Cost • Target buys Levi’s Jeans Dollar Markup = Selling Price - Cost $5 = $23 - $18 for $18. They plans to sell them for $23. What is Target’s markup? What is his percent markup on cost? Percent Markup on Cost = Dollar Markup Cost $5 = 27.78% $18 Check: Selling Price = Cost + Markup Cost (B) = Dollar Markup 23 = 18 + .2778(18) Percent markup on cost $23 = $18 + $5 8-9 $5 = $18 .2778 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 S S S 8-10 = C + M = $100 + .65($100) = $100 + $65 = $165 Dollar Markup 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 = 1.40C 1.40 1.40 $35.71 = C 8-11 M = S - C M = $50 - $35.71 M = $14.29 Markups Based on Selling Price (100%) Dollar ($) markup is the portion (P) Cost + Markup = Selling Price 78.26% + 21.74% = 100% Selling Price is 100% - the Base (B) Percent (%) markup on selling price is the rate (R) 8-12 Calculating Dollar Markup and Percent Markup on Selling Price • Target buys Levi’s Jeans for Dollar Markup = Selling Price - Cost $5 = $23 - $18 $18. They plans to sell them for $23. What is Target’s markup? What is his percent markup on selling price? Percent Markup on Selling Price = Dollar Markup Selling Price $5 = 21.74% $23 Check: Selling Price = Cost + Markup Selling Price = Dollar Markup 23 = 18 + .2174($23) Percent markup on SP $23 = $18 + $5 8-13 $5 = $23 .2174 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 - C M = $285.71 - $100 M = $185.71 8-14 S = C + M S = $100 + .65(S) -.65s - .65S .35s = $100 .35 .35 S = $285.71 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 8-15 Dollar Markup Conversion Formula for Converting Percent Markup on Cost to Percent Markup on Selling Price Formula for Converting Percent Markup on Selling Price to Percent Markup on Cost Percent markup on cost Percent markup on selling price 1+ Percent markup on cost 1- Percent markup on selling price .2778 = 1+.2778 8-16 21.74% .2174 = 27.78% 1-.2174 Equivalent Markup Percent markup on Selling Price 20 25 30 33 35 40 50 8-17 Percent markup on cost (round to nearest tenth percent) 25.0 33.3 42.9 49.3 53.8 66.7 100.0 Markdowns Markdown percent = Dollar markdown Selling price (original) 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% 8-18 $18-$10.80 Markdown Pricing Perishable Items TC TS TS TS = 300lb. X $.14 = $42.00 = TC + TM • Alvin’s vegetable stand = $42 + .60($42) grew 300 pounds of tomatoes. He expects 5% = $67.20 of the tomatoes to become spoiled and not salable. 300 lbs. X .05 = 15lbs The tomatoes cost Alvin Selling $.14 per pound and he $67.20 = $.24 Price per wants a 60% markup on 285lbs. cost. What price per pound pound should Alvin charge for the tomatoes? 300lbs. - 15lbs 8-19 Terminology 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). Variable costs (VC) – Costs that do change in response to changes in the sales 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 8-20 Calculating a Contribution Margin (CM) Contribution margin (CM) = Selling Price (S) – Variable cost (VC) • 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 8-21 Calculating a Breakeven Point (BE) Breakeven point (BE) = Fixed Costs (FC) Contribution margin (CM) • 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) = 8-22 $60,000 (FC) = 50,000 $2.00 (S) - $.80 (VC) Problem 8-19: Solution: Dollar markup = S – C $5,000 Percent markup on cost = $10,000 = 50% $5,000 = $15,000 - $10,000 Check: C= 8-23 Dollar markup . = $5,000 = $10,000 Percent markup on cost .50 Problem 8-21: Solution: $20 = C + .40C $20 = 1.40C 1.40 1.40 Check: Selling price _ Cost = 1 + Percent markup on cost $14.29 = $20 1.40 8-24 Problem 8-24: Solution: a. (S) $13.50 - (C) $8.50 = $5.50 (P) = 68.75% $8.00 (B) 8-25 (M) $5.50 dollar markup 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 8-26 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 = $320 = $3.56 90 cookies (100 cookies – 10%) 8-27