Markup and Markdown

Summary

The video explains the essential business function of determining appropriate selling prices for goods and services. It details the concepts of costs, operating expenses, markup, and markdowns, providing formulas to calculate selling prices, costs, and markups based on both cost and selling price. Examples illustrate how to derive these figures, including calculating percentages for markup and markdowns. The presentation emphasizes the importance of pricing strategies for profitability, showcasing how businesses can adjust prices to maximize sales while covering expenses.

Takeaways

• 💰 Determining an appropriate selling price is crucial for businesses to attract customers while covering expenses and ensuring profit.
• 📊 Business expenses fall into two main categories: cost of goods sold and operating expenses, the latter of which includes salaries, rent, utilities, and advertising.
• 🔍 Markup, also known as margin, is the difference between the cost and the selling price, essential for covering operating expenses and achieving profit.
• 🔢 The retailing equation states that selling price equals cost plus markup: SP = C + M.
• 💵 To find the markup amount, the formula is M = SP - C, where SP is the selling price and C is the cost.
• 📈 Markup can be expressed as a percentage, either based on cost or selling price, affecting how businesses calculate and present their prices.
• 🧮 The formula for percent markup based on cost is: Percent Markup = (Markup / Cost) * 100%.
• 🏷️ Percent markup based on selling price can be calculated as: Percent Markup = (Markup / Selling Price) * 100%.
• 📉 Markdowns are reductions from the original selling price, calculated using the formula: Markdown = Original Price - Sale Price.
• 📅 After markdowns, the new price reflects 100% minus the markdown percentage, crucial for retail pricing strategies.

Q & A

Why is determining an appropriate selling price important for a business?

Determining an appropriate selling price is crucial because it needs to attract potential customers while covering expenses and ensuring a reasonable profit for the company.

What are the two major categories of business expenses?

Business expenses are divided into two main categories: the cost of goods sold (COGS), which includes production costs, and operating expenses, which cover salaries, rent, utilities, and other indirect costs.

What is markup, and how is it calculated?

Markup is the amount added to the cost of an item to cover operating expenses and profit. It is calculated as the difference between the selling price and the cost of the item.

What is the Retailing Equation?

The Retailing Equation states that the selling price of an item is equal to the cost plus markup, represented as E = C + M, where E is the selling price, C is the cost, and M is the markup.

How can markup be expressed as a percentage?

Markup can be expressed as a percentage based on either cost or selling price. Retailers typically use the selling price as the base for these calculations.

What is the formula for calculating percent markup based on cost?

The formula for percent markup based on cost is: Percent Markup = (Markup / Cost) * 100.

What is a markdown, and why is it used in retail?

A markdown is a reduction from the original selling price, often used to clear inventory or correct pricing errors. It is seen as a sales promotion opportunity to increase sales and profit.

How do you calculate the amount of a markdown?

The amount of a markdown can be calculated using the formula: Markdown = Original Selling Price - Sale Price.

What is the relationship between markup percentage and cost percentage?

When markup is based on selling price, the sum of the percent cost and percent markup equals 100%. For example, if the markup is 25%, the cost must be 75% of the selling price.

How do you find the original selling price after a markdown?

To find the original selling price after a markdown, use the formula: Original Selling Price = Sale Price / (1 - Markdown Percentage).