Welcome! In this video, we discuss and solve problems
about markup and markdown. Markup is Selling Price minus Cost.
That is, Selling Price = Cost + Markup. Now, markup comprises of overhead expenses
and profit. That is, Markup = Expenses + Profit.
Selling Price can thus be presented as Cost + Expenses + Profit.
Or, S = C + E + P. Now, the seller can offer to reduce the regular
selling price in order to increase sales. The amount of reduction in the selling price
by the seller is what we call Markdown. Yes, we’ve talked about reduction in price
before, from the perspective of the buyer, and we called that “discount”.
In essence, when the seller issues a markdown on their selling price, the buyer gets a discount.
So, Sale Price = Regular Selling Price minus the amount of Markdown.
Or the amount of Markdown = Regular Selling Price – Sale Price
And the rate of markdown is the amount of markdown divided by the Regular selling price.
In terms of trade discounts, these formulas can be presented as:
Amount of Trade Discount = List Price minus Net Price
And the rate of trade discount = Amount of discount / List Price
Now, let’s solve some problems.
A hardware store buys scrub pants at $7 each. Operating expenses are 30% of cost and required
profit is 50% of cost. That is, Expenses = 0.3($7) which is 2 dollars
and 10 cents. And Profit = 0.5($7) which gives 3 dollars
and fifty cents; So, for part a),
Selling Price = Cost + Expenses + Profit. And that will give $12.60.
For part b), markup can be found by adding expenses and profit, or by Selling Price minus
Cost, and that is $5.60. In part c), we have a 15% markdown. That is,
the regular price of $12.60 is reduced by 15%.
So, the clearance sale price will be $10.71
Number 2) A store purchases a fitness tracker at $59.40.
Overhead expenses are 10% of selling price and the required profit is 30% of the selling
price. So, starting again with Selling Price = Cost
+ Expenses + Profit, we have S = 59.4 + 0.1S + 0.3S
Adding the 0.1S and the 0.3S gives 0.4S. And bringing 0.4S to the left of the “equal
sign”, we have S – 0.4S = 59.4
That is, 0.6S = 59.4
Thus, the regular selling price equals 99 dollars.
Now, during an inventory sale, the tracker was marked down to $64.35 from the regular
price of 99 dollars. So, the amount of markdown is 99 minus 64.35
which gives 34.65. The rate of markdown is therefore the amount
of markdown divided by regular selling price which is 0.35 or 35%
In part c), we need the operating profit due to the sale. So, we can solve for profit in
the selling price formula, but with selling price replaced with sale price.
So, profit = Sale price minus cost minus expenses
(which is 10% of regular selling price, or 9.9)
And that gives a profit of -4.95. That is, a loss of 4 dollars and 95 cents.
Let’s examine one more. A spring jacket that costs a retailer $75
less 35%, 20% is marked up 200% of cost. That is, the retailer received a discount
series of 35% and 20%. So, cost to the retailer is $75 minus 35%,
minus 20%. And that is, $39.
Since markup is 200% of cost, then the amount of markup is 2 times cost which is $78.
The regular selling price is thus Cost + Markup which gives $117.
In c), if expenses are 40% of cost, then expenses are .4 times 39 which gives $15.60.
Now, Markup = Expenses + Profit. That is,
78 = 15.6 + Profit. And solving for profit, we have $62.40.
In d), we want the break-even price; the selling price at which profit equals 0.
That is, Selling Price = Cost + Expenses, which gives $54.60.
Finally, in part e), the jacket was marked down $29.25.
So, the sale price equals the regular selling price of 117 minus the amount of markdown,
which gives $87.75. The amount of markup on cost realized during
the sale will be Sale Price minus Cost.
And that gives $48.75. The rate of markup on cost realized is thus
the amount of markup realized divided by cost. And that gives 1.25 or 125%.
And that’s it for this video. Thanks for watching.