October 13th

Last week, you selected a retailer to study for the remainder of the semester.  No matter which retailer you chose, that retailer invests a lot of time, energy and thought into defining its markup and markdown strategies.  This week, as we explore the mathematical principles of markups and markdowns, you'll learn about both business operations and some of the key terms in business financial statements.   Specifically, you will learn to:

 Calculate markups based on cost Calculate markups based on selling price Solve for the unknowns when any 2 of the following 4 factors are known:  dollar markup, percent markup, cost and selling price Convert from percent markup on cost to percent markup on selling price, and vice versa Calculate markdowns, and compare markups and markdowns Price perishable items to cover spoilage loss

You're entering the world of retail math!

Markups

Markup is the difference between what a product costs you, the retailer, and what you sell it for to a customer.  It is also known as gross margin, or gross profit in a financial statement.

Last week, we used the example of an automobile to explain discounts.  Let's stay with that example this week.  The car we were looking at last week was priced at \$20,000 (MSRP, or Manufacturer's Suggested Retail Price) to those of us in the car-buying public.  That car, net of all the trade discounts, cost the car dealer \$12,380.  Markup (or gross margin, or gross profit) is simply the difference between those two numbers, or \$7,620.  In formula format, M (markup) = S (selling price) - C (cost).  Expressed as a percent markup on cost, it would be \$7,620/\$12,380 = 61.55%.  The equation is %M = M/C.

Your textbook guides you through all of the math involved in markups with formulas, blueprints, and checks (how to ensure you have the right answer).  If you struggled with the portion formula, please go back to chapter 6 to review that before you tackle this chapter.  The portion formula is the basis for ALL of this math, so you must fully understand that formula if you're to succeed at markups.  If you find any of this confusing, you might want to visit Commercial Discount, Markup and Markdown.  This site covers the same material, but with a slightly different approach and different examples.

Markdowns

Those of you that love a good bargain will love this math.  Markdowns are reductions from the original selling price.  There are many reasons that a retailer would mark down a product.  In our car example, it could be the change in model year, and the dealer may need to sell all of last year's models to make room for the new model year.  In a butcher shop or bakery, the product is perishable, and the retailer can either sell product that's nearing it's shelf life limitations at a discount or throw it out.  Many businesses offer special year-end promotions (or sales, or markdowns) to encourage customers to buy before the fiscal year (the 12-month period used for financial reporting for publicly-held companies) ends.

The portion formula is again the basis of markdown calculations.  Continuing with our car example, it's the end of the model year, and the new cars are about to arrive.  The dealer decides to reduce the price of the car you want from \$20,000 to \$18,500 to try to sell it before the new cars arrive.  What's the markdown percent?  It is \$1,500 (the dollar markdown of \$20,000 - \$18,500) / \$20,000 (the original selling price), or 7.5%.   If you buy at the sale price, you'll have saved 7.5% vs. the original price of the car.  Not too bad!

The text also walks you through the steps to calculate a series of markdowns and markups, which is often how business actually operates.  An item is on sale, off sale, the price increases due to increased store labor costs, a new competitor opens and prices must be marked down.  If you're interested in retailing (operating or working in a retail store), there's an excellent website that provides a guide to how to price the products in your store-- Small Business Marketing:  Pricing in a Retail Store (Checklist).

Finally, the author of your text provides guidance for pricing perishable items, when you KNOW that some of our product will spoil prior to sale and you want to ensure your pricing allows you to still make a profit despite that spoilage.

Want to test your learning for some extra credit?  There are 3 extra credit points available if you can answer the 3  parts of Challenge Problem 8-38 correctly.  Send me an email with your 3 answers by Sunday, and you can earn 1 point for each correct answer.