Chapter 08 Markups and Markdowns: Perishables and Breakeven Analysis McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved

Chapter 08

Markups and Markdowns: Markups and Markdowns: Perishables and Breakeven Perishables and Breakeven

AnalysisAnalysis

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

8-2

1. Calculate dollar markup and percent markup on cost

2. Calculate selling price when you know cost and percent markup on cost

3. Calculate cost when dollar markup at percent markup on cost are known

4. Calculate cost when you know the selling price and percent markup on cost

Markups and Markdowns; Perishables and Breakeven Analysis#8#8Learning Unit ObjectivesMarkup Based on Cost (100%)LU8.1LU8.1

8-3

1. Calculate dollar markup and percent markup on selling price

2. Calculate selling price when dollar markup and percent markup on selling price are known

3. Calculate selling price when cost and percent markup on selling price are known

4. Calculate cost when selling price and percent markup on selling price are known

5. Convert from percent markup on cost to percent markup on selling price and vice versa

#8#8Learning Unit ObjectivesMarkup Based on Selling Price (100%)LU8.2LU8.2

Markups and Markdowns; Perishables and Breakeven Analysis

8-4

1. Calculate markdowns; compare markdowns and markups

2. Price perishable items to cover spoilage loss

#8#8Learning Unit ObjectivesMarkdowns and PerishablesLU8.3LU8.3


8-5

1. Calculating Contribution Margin (CM)

2. Calculating a Breakeven Point (BE)

#8#8Learning Unit ObjectivesBreakeven AnalysisLU8.4LU8.4


8-6

Terminology

Selling Price - The price retailers charge customers

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

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

8-7

Basic Selling Price Formula

Selling price (S) = Cost (C) + Markup (M)

$23Jean

$18 - Pricepaid to bring

Jeansinto store

$5 - Dollars to

cover operating

expenses and make a profit

8-8

Markups Based on Cost (100%)

Cost + Markup = Selling Price

100% 27.78% 127.78%

Cost is 100% - the Base

Dollar markup is the portion

Percent markup on

cost is the rate

8-9

Calculating Dollar Markup and Percent Markup on Cost

• Gap buys fleece jacketsfor $18. They plans to sell them for $23. What is Gap’s markup? What is the percent markup on cost?

Dollar Markup = Selling Price - Cost

$ 5 = $23 - $18

Percent Markup on Cost = Dollar Markup Cost $5 = 27.78%$18

Check: Selling Price = Cost + Markup23 = 18 + .2778(18)

$23 = $18 + $5

Cost (B) = Dollar Markup Percent markup on cost

$5 = $18 .2778

8-10

Calculating Selling Price When You Know Cost and Percent Markup on Cost

• Mel’s Furniture bought a lamp for $100. To make Mel’s desired profit, he needs a 65% markup on cost. What is Mel’s dollar markup? What is his selling price?

S = C + MS = $100 + .65($100)S = $100 + $65S = $165 Dollar Markup

8-11

Calculating Cost When You Know Selling Price and Percent Markup on Cost

• Jill Sport, owner of Sports, Inc., sells tennis rackets for $50. To make her desired profit, Jill needs a 40% markup on cost. What do the tennis rackets cost Jill? What is the dollar markup?

S = C + M$50 = C + .40(C)$50 = 1.40C1.40 1.40$35.71 = C

M = S - CM = $50 - $35.71M = $14.29

8-12

Markups Based on Selling Price (100%)

Cost + Markup = Selling Price

78.26% + 21.74% = 100%

Selling Price is 100% - the

Base (B)

Dollar ($) markup is the

portion (P)

Percent (%) markup on

selling price is the rate (R)

8-13

Calculating Dollar Markup and Percent Markup on Selling Price

• The cost to Gap for a hooded fleece jacket is for $18; the store then plans to sell them for $23. What is Gap’s dollar markup? What is its percent markup on selling price?

Dollar Markup = Selling Price - Cost

$ 5 = $23 - $18

Percent Markup on Selling Price = Dollar Markup Selling Price $5 = 21.74%$23

Check: Selling Price = Cost + Markup23 = 18 + .2174($23)

$23 = $18 + $5 $5 = $23 .2174

Selling Price = Dollar Markup Percent markup on SP

8-14

Calculating Selling Price When You Know Cost and Percent Markup on Selling Price

• Mel’s Furniture bought a lamp for $100. To make desired profit, he needs a 65% markup on selling price. What are Mel’s selling price and dollar markup?

M = S - CM = $285.71 - $100M = $185.71

S = C + MS = $100 + .65(S)-.65s - .65S .35s = $100.35 .35S = $285.71

8-15

Calculating Cost When You Know Selling Price and Percent Markup on Selling Price

• Jill Sport, owner of Sports, Inc., sells tennis rackets for $50. To make her desired profit, Jill needs a 40% markup on selling price. What is the dollar markup? What do the tennis rackets cost Jill?

S = C + M$50 = C + .40($50)$50 = C + $20-20 - $20$30 = C

Dollar Markup

8-16

Conversion

Formula for Converting Percent Markup on Selling Price to Percent Markup on Cost

Percent markup on selling price1- Percent markup on selling price

.2174 = 27.78% 1-.2174

Formula for Converting Percent Markup on Cost to Percent Markup on Selling Price

Percent markup on cost 1+ Percent markup on cost

.2778 = 21.74% 1+.2778

8-17

Equivalent Markup

Percent markup on Percent markup on cost Selling Price (round to nearest tenth percent)

20 25.025 33.330 42.933 49.335 53.840 66.750 100.0

8-18

Markdowns

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%

$18-$10.80Markdown

Markdown percent = Dollar markdown Selling price (original)

8-19

Pricing Perishable Items

• Alvin’s vegetable stand grew 300 pounds of tomatoes. He expects 5% of the tomatoes to become spoiled and not salable. The tomatoes cost Alvin $.14 per pound and he wants a 60% markup on cost. What price per pound should Alvin charge for the tomatoes?

TC = 300lb. X $.14 = $42.00TS = TC + TMTS = $42 + .60($42)TS = $67.20

300 lbs. X .05 = 15lbs

$67.20 = $.24 285lbs.

300lbs. - 15lbs

Selling Price per pound

8-20

Break Even Analysis - Terminology

Variable costs (VC) – Costs that do change in response

to changes in the sales

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).

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

8-21

Calculating a Contribution Margin (CM)

• 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

Contribution margin (CM) = Selling Price (S) – Variable cost (VC)

8-22

Calculating a Breakeven Point (BE)

• 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) = Fixed Costs (FC)Contribution margin (CM)

Breakeven point (BE) = $60,000 (FC) = 50,000 $2.00 (S) - $.80 (VC)

8-23

Problem 8-19:

Solution:

Dollar markup = S – C Percent markup on cost = = 25%

$3,000$12,000

$3,000 = $15,000 - $12,000

Check:

C = = = $12,000 Dollar markup . Percent markup on cost

$3,000 .25

8-24

Problem 8-21:

Solution:

$20 = C + .40C $20 1.40C1.40 1.40

$14.29 = C

=

Check:Cost =

$14.29 =

Selling price _1 + Percent markup on cost

$201.40

8-25

Problem 8-24:

Solution:

Markup = $1.50 - $.42 = $1.08

$1.08/.42 = .25714 = 257.14%

Check: $1.50 = $.42 + 257.14(.42)

$1.50 = $.42 + 1.08

$1.50 = $1.50

8-26

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

8-27

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 = = $3.56

(100 cookies – 10%)

$32090 cookies

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Chapter 08 Markups and Markdowns: Perishables and Breakeven Analysis McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved