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 businesss profit is not the same as its

markup. Markup is the difference between the
cost of an item and the retail price. Profit is
whats 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

To compute retail price
using the retail method, fill in
$ % $ %
the boxes following the letter
sequence (J-O). Note that
Retail Price M J Retail Price M J
100 11.25 100 the box labeled J (RP%) is
always 100%. The amounts
Markup N K Markup N K that go in the boxes labeled
4.50 40
K (MU%) and O (C$) are
Cost O L Cost O L usually known. Why is this
6.75 6.0
retail box an example of the
retail method for calculating
markup?

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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
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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($) continued
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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