Chapter 7

Markup and
Markdown

Markup on Cost

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 Recognize the Terms
Used in Selling

Cost is the amount paid to the manufacturer or

supplier after trade and cash discounts have been
taken. Shipping and insurance charges are
included in cost.

Selling price is the price at which merchandise is

offered for sale to the public.

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 Recognize the Terms
Used in Selling
Markup, margin, or gross profit is the difference
between the cost and the selling price.

Operating expenses, or overhead, include the

expenses of operating the business, such as
wages and salaries of employees, rent for
buildings and equipment, utilities, insurance, and
advertising.

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 Recognize the Terms
Used in Selling
Net profit (net earnings) is
• the amount (if any) remaining for the business
after operating expenses and the cost of goods
have been paid. (Income tax is computed on
net profit.)

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 Use the Basic Formula
for Markup
The basic markup formula that follows shows
that the selling price is the sum of the cost and the
markup.

Selling Price = Cost + Markup

S = C + M

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 Example

Rose received three different types of snowshoes

in one shipment. Use the basic markup formula
to find the unknown for each of the following.

(a) C $34.48 (b) C $83.82 (c) C $

+ M $13.40 + M$ + M $68.17
S $ S $124.99 S $227.24
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 Example

(a) C $34.48 (b) C $83.82

+ M $13.40 + M $41.17
S $47.88 S $124.99

(c) C $159.07
+ M $68.17
S $227.24
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 Calculate Markup Based on Cost

Markup on cost: markup is stated as a percent of

cost

• Application of basic percent equation

• Base is cost, or 100%

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 Finding Markup on Cost
Amount of markup
Markup on cost =
Cost

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 Apply Percent to Markup Problems
Use the formulas:
Markup = Selling price – Cost

Markup as a percent of Cost

= Markup ÷ Cost

Selling price as a percent of Cost

= Selling price ÷ Cost
State the markup as a percent
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 Example

The manager of a discount store bought hiking

boots manufactured in Mexico for $60 and plans
to sell them for $81 a pair. Find the percent of
markup based on cost.

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 Example
Cost is the base, or 100%. All other percents
must be in terms of cost.
Find the unknown values as follows.
Markup = Selling price – Cost
= $81 – $60 = $21

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 Example
Selling price percent = 100% + Markup %
= 100% + 35% = 135 %

Markup based on cost is 35% and selling price is

135% of cost.
100% C $60
35% M $21
135% S $81

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 Example

Olympic Sports places a markup on a 50-lb iron

barbell set of $16, which is 50% based on cost.
Find the cost and the selling price.

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 Example
Cost is the base, or 100%. Cost is not known.
Find the cost using the fact that markup of $16 is 50%
of cost.
Markup = 50% × Cost
$16 = .5 × C
• Divide both sides of the equation by .5
C = $16 ÷ .5 = $32
• Complete the table by adding the percent and
dollar columns to find the totals.

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 Example

100% C $32
+ 50% M $16
150% S $48

The cost to the retailer is $32, the selling price is

$48, or 150% of the cost.

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 Example - TRY
Find the markup and the selling price for an Adidas
hooded sweatshirt if the cost is $23.60 and the
markup is 45% of cost.

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 Example
Cost is the base, or 100%. Cost is known.

Percent column totals 145%. Use the basic percent

equation to find the following.
M = 45% of Cost = .45 × $23.60
= $10.62

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 Example
The selling price can be found either by adding
the cost of $23.60 to the markup of $10.62, or as
follows:
S = 145% of Cost = 1.45 × $23.60 = $34.22

The selling price of the hooded sweatshirt is

$34.22.
100% C $23.60
+ 45% M $10.62
145% S $34.22
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 Example

The retail price of a 50-inch portable basketball

system is $549.99. The retailer has operating
expenses of 29.5% and wants a 5.5% profit, both
based on cost, on this item. First find the total
markup on cost; then find cost and markup.

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Markup on Selling
Price

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 Understand the Phrase
Markup Based on Selling Price

Retailers often compare business operations to

sales revenue and therefore often prefer to use
markup on selling price.

In this case, markup is stated as a percent of

selling price.

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 Finding
Markup Based on Selling Price

Amount of markup
Markup on selling price =
Selling price

The same basic markup formula is used when

using markup on selling price:
C + M = S.

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 Example

To remain competitive, Rose sells sunglasses for

only $39.99. They pay $35 for each pair and
calculate markup on selling price. Find :
• the amount of markup
• the percent of markup on selling price
• the percent of cost on selling price.

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 Example
Set up the problem. Selling price is base.
Markup = Selling price – Cost
= $39.99 – $35 = $4.99
Part
Rate =
Base
$4.99
= = 12.5%
$39.99

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 Example
Cost as a percent of selling price can be found either by
subtracting 100% – 12.5%, or by dividing the cost of $35 by
the selling price of $39.99.
87.5% C $35.00
12.5% M $4.99
100% S $39.99
Here, selling price is the base and is associated with
100%. The markup in this example is very low—Rose
will probably take a loss on these sunglasses, but
managers hope the low price will bring customers into
the store.
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 Use the Markup Formula to Solve
Variations of Markup Problems

The basic formula may be used for all markup

problems in which selling price is the base.
The selling price has a percent value of 100%.

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 Example

A Kmart® employee needs a 35% markup on

selling price in order to have a markup of $5.16
on a pair of “PRO CLASSIC” Batting Gloves.
How much can Kmart afford to pay for each pair
of gloves?

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 Example
Cost as a percent of selling price is found by
subtracting 35% from 100% to find 65%.
65% C $ ?
35% M $5.16
100% S $ ?
Find the selling price as follows.
Markup = 35% of selling price
$5.16 = .35 × S
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 Example
Divide both sides by .35 to find the selling price.
S = $5.16 ÷ .35 = $14.74
Finally, find the cost by subtracting.
C = S – M = $14.74 – $5.16 = $9.58
The final table is shown here.
65% C $9.58
35% M $5.16
100% S $14.74
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 Example
Find the markup on a dartboard made in England
if the cost is $27.45 and the markup is 25% of
selling price.

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 Example
Subtract 25% from 100% to find that cost is 75%
of selling price.
75% C $27.45
25% M $ ?
100% S $ ?
Cost = 75% of selling price
$27.45 = .75 × S
S = $27.45 ÷ .75 = $36.60
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 Example
Finally.

Selling price – Cost = $36.60 – $27.45

= $9.15
Here is the completed table.
65% C $27.45
35% M $ 9.15
100% S $36.60
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 Determine the Percent Markup on Cost and the
Equivalent Percent Markup on Selling Price

Salesperson who sells to both manufactures and

retailers will compare markup on cost with
markup on selling price
May have to make conversions between the two
methods

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Section 3
Markdown

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 Define the term Markdown when
Applied to Selling
When merchandise does not sell, the price is often
reduced

Difference between the original selling price and

the reduced selling price is called the markdown
Selling price after markdown is called the
reduced price, sale price, or actual selling price

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 Finding Reduced Price

Reduced price = Original price – Markdown

We use the preceding formula along with the

formula Part
Rate =
Base

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 Example

Olympic Sports has marked down an Atlas Home

Fitness Center.

Find the reduced price if the original price was

$2879 and the markdown is 30%.

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 Example
The markdown is 30% of $2879,
or .3 × $2879 = $863.70.
Find the reduced price as follows.
$2879.00
− 863.70
$2015.30
The reduced price is $2015.30.

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 Example

The total inventory of coffee mugs at the local

bookstore has a retail value of $785. If the mugs
were sold at reduced prices that totaled $530,
what is the percent of markdown on the original
price?

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 Example
First find the amount of the markdown.
$785
−530
$255
Use the rate formula.
Part 255
Rate = = = .3248 = 32.5%
Base 785
The mugs were sold at a markdown of 32.5%.
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 Example

Bouza’s Baby News offers a child’s car seat at a

reduced price of $63 after a 25% markdown
from the original price.

Find the original price.

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 Example
After the 25% markdown, the reduced price of
$63 represents 75% of the original price. The
original price, or base, must be found.

Part 63
Base = = = $84
Rate .75
The original price of the car seat was $84.

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 Define Terms Associated with Loss

break-even point is a selling price that covers just

the cost of the item plus the associated
overhead, including operating expenses. A
company neither makes profit nor losses money
on an item sold at the break-even point.

reduced net profit occurs when an item is marked

down from the original price but is still sold for
more than the break-even point.
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 Define Terms Associated with Loss
operating loss occurs when the selling price of an
item is below the break-even point but above the
cost of the item.

absolute loss, or gross loss, occurs if the selling

price is less than the actual cost paid for the item.
For example, a firm that buys a pair of slacks for
$38 and then sells the slacks for $25 has an
absolute loss, which is the difference between
the two, or $13.
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Define Terms Associated with Loss

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 Helpful Formulas

Break-even point = C + OE
= Cost + Operating expenses

Operating loss
= Break-even point - Reduced selling price

Absolute loss
= Cost - Reduced selling price

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 Example

Appliance Giant paid $1600 for a 60-inch LCD

flat-panel HDTV. If operating expenses are 30%
of cost and the television is sold for $2000, find
the amount of profit or loss.

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 Example
Operating expenses are 30% of cost.
Operating expenses = .30 × $1600 = $480

The break-even point for the LCD HDTV is

Cost + Operating expenses = Break-even point
$1600 + (.3 × $1600)
= $1600 + $480
= $2080 break-even point

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 Example
So, the company makes a profit if the television
is sold for more than the $2080 break-even point
or incurs a loss if sold for less. Since the selling
price is $2000, there is a loss, found as follows.

$2080 – $2000 = $80

The $80 loss is an operating loss, since the
selling price is less than the break-even point but
greater than the cost.

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 Example

A game table normally selling for $360 at Rick’s

Sporting Goods is marked down 30%. If the cost
of the game table is $260 and the operating
expenses are 20% of cost, find

(a) the operating loss and

(b) the absolute loss.

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 Example
(a) Break-even point
= Cost + Operating expenses
= $260 + 20% of $260
= $312
Reduced price = $360 – (.3 × $360)
= $360 – $108 = $252
Operating loss = $312 – $252
= $60
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