To skip to Table of Contents. Module # 03. Channel Markups. links to an AV for a case or topic! gopala "GG" ganesh, ph.d. m&m_m03

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1 To skip to Table of Contents Module # 03 Channel Markups links to an AV for a case or topic! 1

2 This presentation requires.. Internet Explorer or Firefox or Chrome browser Adobe Reader 9.0 or better MS Office 2010 or 2013 For all links to work properly! 2

3 How to Navigate? Internet Explorer or Chrome To go forward, use ν or >, page down, enter or space bar To go back, use ^ or < or page up Most links will open in the same window Back arrow at the top will return you to the presentation Firefox To go forward, use ν or >, page down, enter or space bar To go back, use ^ or < or page up Links will open either in the same window or a new tab If same window, back arrow will return you to the presentation If new tab, just delete that tab, using the X, to return Some links, e.g., Excel xlsx files, will open in a new window, which maybe closed when done 3

4 Before We Begin! Please make sure that you have a Note pad or writing paper Several sharpened #2 Pencils with erasers Calculator with +-*/ and ^ functions A dedicated flash drive or equivalent I strongly recommend writing down and repeating calculations, if any, with me, pencil on paper. Likewise, practice all video explanations yourself. Ditto for Excel workbooks. Please DO NOT just read on the screen! 4

5 A handout of this module! A handout of this module, for your convenience! Adobe pdf file, 2 slides to a page Use this for taking notes, exam refresher etc. Please DO NOT use this as your main source of information. Go through the on-screen material. Hyperlinks are excluded here. To access those, you must go to the on screen slides. Here is the link to the handout! 5

6 Covered in Module 03 Slide Topic Slide Topic 08 Channel markups 27 Caution: markup% and formulae 10 What is markup? 28 Example: Lone Star Lamp Co 11 Markup in a multi-level channel 36 LSLC: markup chain 14 Expressing markups 41 Example: Krispy Kreme 18 Applying markups 50 KKC: markup chain 22 The four main markup formulae 53 Example: Western Boot Co 23 Converting markups 58 Example: Baby Magic Co 26 Summary: All 6 markup formulae 62 Markdowns 6

7 In this Module.. After completing this module, you will: Understand channel markups Be able to express markup in dollars and as a % Know the bases for expressing markup as a % Recognize and use the correct markup formula. Recognize what markup information is known and unknown in a given situation and proceed further correctly based on that knowledge. Be able to convert markup % from one base to another Know the difference between markup and markdown. 7

8 Channel Markups Few consumer products are sold directly by the manufacturer to the consumer. Sometimes, there is one intermediary between the two, such as a retailer. Typically, there is a wholesaler as well, resulting in the Manufacturer wholesaler retailer consumer channel Occasionally, the channel is even longer with regional wholesalers distributing to local wholesalers. Intermediaries are used in business to business marketing also, but those channels are typically shorter Such as manufacturer-wholesaler-customer Industrial wholesalers have other names as well e.g. dealers 8

9 Channel Markups Intermediaries facilitate the distribution and flow of products from manufacturer to consumer. by making them available in the right assortments in the right quantities at the right price in the right place and time. They are compensated using channel markups, also called margins. Typically, the markup is a small dollar amount per unit. The intermediary makes money through high volume sales. 9

10 What is markup? Markup is the dollar difference between the cost (or buying price) and selling price of the intermediary. Example: a retail store buys a bottle of ketchup from the wholesaler for $1.50 and sells it for $2.00. Here, the retailer markup is $0.50. Therefore, the wholesaler sells the same ketchup bottle for $1.50. In turn, they buy from the manufacturer for $1.25. Hence, the wholesaler markup is $

11 Markup in a multi-level channel As mentioned earlier, a distribution channel might have multiple levels of intermediaries The product moves from the manufacturer to the regional wholesaler to the local wholesaler to the retail store to the consumer Some large retail chains may perform their own integrated wholesale function as well At each level, the markup is the dollar difference between cost and selling price at THAT level 11

12 Markup in a multi-level channel Manufacturer produces for $4 Manufacturer sells to wholesaler for $7 Wholesaler buys from manufacturer for $7 Wholesaler sells to retailer for $9 Retailer buys from wholesaler for $9 Retailer sells to consumer for $10 12

13 Markup in a multi-level channel Here, the markup of the retailer = $10-$9 = $1 And markup of the wholesaler is $9-$7=$2 The markup of the manufacturer is typically not referred to as a markup, but as profit margin: $7-$4 = $3 However, it IS markup and may be treated that way. Note that while wholesalers and retailers buy and sell, manufacturers produce and sell. Intermediaries break bulk. Manufacturers add value. 13

14 Expressing markups Although markup is a dollar amount, it is typically expressed as a percentage. e.g. markup of 25% This percentage is based either on cost or selling price, resulting in two percentages for the same dollar markup. In our earlier example, the retailer receives a dollar markup of $1. This amount is.. 1/10=10.00%, based on the $10 retailer selling price 1/9=11.11%, based on the $9 retailer cost 14

15 Expressing markups Therefore, the same dollar markup of $1 is: 10% markup (based) on selling price OR a 11.11% markup (based) on cost Both are correct Similarly, the wholesaler markup of $2 is: 2/9 or 22.22% musp, OR 2/7 or 28.57% muc 15

16 Expressing markups The manufacturer markup of $3 is: 3/7 or 42.86% musp, OR 3/4 or 75% muc Note that, in all these instances, %muc is greater than %musp. This is because, in calculating both %s, the numerator is $ markup. denominator is cost (%muc) or selling price (%musp) cost is almost always lower than selling price. Hence, cost in the denominator produces a larger % than selling price in the denominator. 16

17 Expressing markups In the USA, markup is more likely to be encountered as a % than $ amount Due to the ubiquity of retailing, % musp is more widely used than % muc. Retailers naturally focus on selling price and typically use %musp, also referred to as % retail margin or, simply, %margin Manufacturers relate better to their cost and therefore are likely to use %muc, typically referred to as just markup We shall use %musp and %muc in this class for absolute clarity. Dollar markup may also be found in some instances, in conformity with standard industry practices e.g. in the paperback book publishing, one may encounter a wholesaler markup of $20.16 per gross or 144 books Therefore, every $ markup has TWO associated %s markup: %musp and %muc The $2 markup of the wholesaler, previously referred to maybe expressed either as 22.22% musp OR 28.57% muc, since sp=$9 and cost=$7 One of our goals in this class is to be able to handle %musp and %muc, easily and correctly, each and every time. 17

18 Applying markups In marketing management situations, there is often a need to determine channel prices: Figure out wholesaler and retailer selling prices, given manufacturer selling price Figure out wholesaler and manufacturer selling prices, given retailer selling price Very easily done, with $ markup information. More often, however, only % markup is known. This calls for a proper understanding and application of markup formulae. 18

19 Applying markups Start with a different example Consider a retailer, who buys for $8 and sells for $10 keeping a markup of $2 That is, $8 plus $2 equals $10 $cost plus $ markup equals $ selling price The $2 markup may be expressed in two different ways: 20%musp and 25%muc 19

20 Applying markups Let us consider %musp first. We know that.. ($ selling price) minus ($ markup) equals ($cost). That is.. $10 minus $2 = $8. since the $2 markup is 20% of the $10 selling price, we may write, $10 minus 20%*$10 = $8 That is, $sp minus %musp * $sp = $cost Algebraically, this is the same as saying, $sp * (1-%musp) = $cost And.., $sp = $cost/(1-%musp) 20

21 Applying markups Next, let us look at %muc. We also know that. ($cost) plus ($ markup) equals ($ selling price). That is.. $8 plus $2 = $10. since the $2 markup is 25% of the $8 cost, we may write, $8 plus 25%*$8 = $10. That is, $cost plus %muc*$cost = $sp Algebraically, this is the same as saying, $cost * (1+%muc) = $sp And.., $cost = $sp/(1+%muc) 21

22 The four main markup formulae Hence, here are the 4 markup formulae: when %markup is based on selling price, Formula 1: $cost=$selling price *(1-%musp) Formula 2: $selling price =$cost/(1-%musp) when %markup is based on cost, Formula 3: $selling price=$cost*(1+%muc) Formula 4: $cost=$selling price/(1+%muc) 22

23 Converting markups Sometimes, a company that is used to %musp may enter a new business or market where %muc is the norm OR vice versa. We saw earlier that although %musp and % muc are different, the underlying $ markup is the same. Still, it is useful to know how to convert one percentage to the other. This is done, quite easily! 23

24 Converting markups Both Formula 1 and Formula 4 calculate $cost. Hence, they must be the same. Therefore, F1: $sp * (1-%musp) = F4: $sp/(1+%muc) divide both sides by $sp, we get (1-%musp) = 1/(1+%muc). Transposing, %musp = 1 1/(1+%muc). Simplifying.. %musp = %muc/(1+%muc) 24

25 Converting markups again: F1: 1-%musp = F4: 1/(1+%muc) restated this as (1+%muc)=1/(1-%musp). or, %muc=(1/(1-%musp)) 1. Simplifying.. %muc = %musp/(1-%musp) Hence: Formula 5: %musp = %muc/(1+%muc) Formula 6: %muc = %musp/(1-%musp) 25

26 Summary: All Six Markup Formulae when %markup is based on selling price: Formula 1: $cost=$selling price *(1-%musp) Formula 2: $selling price =$cost/(1-%musp) when %markup is based on cost: Formula 3: $selling price=$cost*(1+%muc) Formula 4: $cost=$selling price/(1+%muc) Markup conversions: Formula 5: %musp = %muc/(1+%muc) Formula 6: %muc = %musp/(1-%musp) 26

27 Caution: Markup % and Formulae Watch out! Formulae 1 through 4 are correct ONLY when all the three things: selling price, cost and % markup refer to the same channel entity i.e. wholesaler, retailer etc. What does this mean? Say, you know the wholesaler s cost and would like to figure out wholesaler selling price. Markup is given as 20% of retailer s cost. This DOES NOT mean the markup of the wholesaler is 20%MUC. It is actually 20%MUSP. Since the problem says 20% of retailers cost and we need to ensure that all three things apply to the wholesaler, the 20% of retailer cost must be reinterpreted (correctly) as 20% of the wholesaler s selling price. Likewise, if the markup% had been given as 20% of manufacturer selling price, it is NOT 20%MUSP, but 20%MUC, since we need to interpret the 20% markup in terms of the wholesaler. Manufacturer sells to the wholesaler and therefore, manufacturer selling price = wholesaler cost! 27

28 An Example: LSLC I am grateful to Professor Sam Gillespie for this printable case. Lone Star Lamp Company (LSLC) produces and markets a line of modern household lamps through wholesalers to the retail furniture trade. LSLC sells the lamps to wholesalers for $37.00 apiece. If wholesalers take a markup on selling price of 25% and retailer markup is 40 % on their cost, what is the price paid by consumers for the lamps? 28

29 Lone Star Lamp Company This is a typical markup problem. The top down situation the manufacturer selling price is $37 per lamp. You are asked to calculate the retail selling price in a channel that also includes wholesalers Wholesaler markup on selling price (25%) and retailer markup on cost (40%) are also given. In this and other markup problems, start with a channel flow diagram, on paper, as shown next. Once you feel comfortable with markups, you may dispense with this intermediate step. 29

30 LSLC: Channel Flow Diagram LSLC sells a lamp to wholesaler for $37 Wholesaler buys a lamp for $37 Wholesaler % markup on sp = 25% Wholesaler sells lamp for $X Retailer buys lamp for $X Retailer % markup on cost = 40% Retailer sells lamp for $Y Consumer buys lamp for $Y 30

31 LSLC: Channel Flow Diagram The key to correct application of markup information is to identify the formula that applies. Since manufacturer selling price is known, we shall proceed top down. Start with the wholesaler and $X. Ask the following questions. Is $X a cost or a selling price? The answer is selling price Is cost known? The answer is yes and it is $37 Is the % markup known and is it based on cost or selling price? The answer is yes, 25% and it is based on selling price Which markup formula enables calculation of selling price when cost and %markup sp are known? The answer is Formula 2 Applying Formula 2, $sp=$c/(1-%musp) = 37/(1-.25) = $49.33 The wholesaler sells and the retailer buys for $X=$

32 LSLC: Channel Flow Diagram Next consider the retailer and $Y. Ask the following questions. Is $Y a cost or a selling price? The answer is selling price Is cost known? The answer is yes and it is $49.33 Is the % markup known and is it based on cost or selling price? The answer is yes, 40% and it is based on cost Which markup formula enables calculation of selling price when cost and %markup cost are known? The answer is Formula 3 Applying Formula 3, $sp=$cost*(1+%muc) = * (1+.4) = $69.06 The retailer sells and the consumer buys for $Y=$69.06 Here is the completed channel flow diagram! 32

33 LSLC: Channel Flow Diagram LSLC sells a lamp to wholesaler for $37 Wholesaler buys a lamp for $37 Wholesaler % markup on sp = 25% Wholesaler sells lamp for $49.33 Retailer buys lamp for $49.33 Retailer % markup on cost = 40% Retailer sells lamp for $69.06 Consumer buys lamp for $

34 LSLC: Converting % Markups with the completed Channel Flow Diagram Look at the wholesaler (25% mu on selling price) Their $ markup is $49.33 minus $37.00 = $12.33 Verify that is 25% * But it may also be stated as 12.33/37 = 33.32% on cost base This conclusion may be reached via Formula 6 as well: %muc = % musp /(1-%musp) o Therefore %muc = 25%/(1-25%) = 33.33% Notice that %musp is less than % muc. 34

35 LSLC: Converting % Markups with the completed Channel Flow Diagram Look at the retailer (40% mu on cost) Their $ markup is $69.06 minus $49.33 = $ is indeed 40% * But it is also 19.73/69.06=28.57% on selling price base This conclusion may be reached via Formula 5 as well: %musp = %muc/(1+%muc) o Therefore, % musp = 40%/(1+40%) = 28.57% Notice that again, %musp is less than % muc 35

36 LSLC: Markup Chain Formulae Sometimes, you are really interested ONLY in the manufacturer or retailer selling price. The intermediate steps are not required. You may use your knowledge of the markup chain down the channel. Assume here that given the manufacturer LSLC s sp of $37, we would like to know the consumer purchase price, i.e. the retailer selling price. We apply the wholesaler and retailer markups, correctly, in one step. USP retailer = {[$37/(1-25%)] * (1+40%)} = $

37 LSLC: Markup Chain Formulae Note that the computation inside the [ ] calculates the wholesaler selling price, given their cost (i.e. LSLC selling price) of $37. The wholesaler selling price is the retailer s cost, but this is not explicitly calculated here, unlike the earlier example. Likewise, the computation inside the { }, calculates the retailer selling price (i.e. consumer cost), from the just calculated retailer cost, contained within the [ ]. Knowledge of the markup chain can shorten worksheets! Note that markup chains may also include $markup, not just %markup. 37

38 LSLC: Markup Chain Formulae It works just the opposite in the reverse direction i.e. up the channel. Say you know the retail selling price of a lamp, that is $69.06 You want to calculate the manufacturer LSLC s selling price. Knowing the markup chain, this is done easily. Here, we first apply the retailer and then the wholesaler markups, correctly, in one step. 38

39 LSLC: Markup Chain Formulae USP of LSLC = {[$69.06/(1+40%)] * (1-25%)} = $37.00 Note that the computation inside the [ ] calculates the retailer cost (wholesaler selling price), given their retailer (i.e. consumer cost) of $ The retailer cost is the wholesaler s selling price, but this is not explicitly calculated here, unlike the earlier example. Likewise, the computation inside the { }, calculates the wholesaler cost (LSLC selling price), from the just calculated wholesaler selling price, contained within the [ ]. 39

40 Lone Star Lamp Co: Excel Workbook A workbook is unnecessary for doing markup calculations The LSLC workbook simply illustrates how to work with markup information in a case worksheet. Now, proceed to the workbook and solve it. Afterwards, compare your solutions with the solved sheet. Note that due to rounding, Excel and hand calculations may not match exactly! Did you do the Markup Chain correctly? Here are my cell formulae, for comparison purposes. if you have difficulties with any calculations. Format the cells and print your workbook. Make it look just like my solutions! Print cell formulae also from your workbook Make it look just like my formula printout! 40

41 A Second Example: KKC I am grateful to Prof. Sam Gillespie for this printable case. Krispy Kreme Co doughnuts are sold at the outlets of the chain. They are also sold through retail outlets such as Chevron convenience stores and Albertson s supermarkets. At these places, consumers pay $4.49 per box. Retailers earn 27% on consumer cost. Wholesalers typically earn 25% markup on manufacturer selling price. Figure out KKC s selling price. 41

42 Krispy Kreme Co Note the markup information. The retailer has a 27% markup on consumer cost. Since we are dealing with the retailer, we need to reinterpret this, in terms of the retailer. Therefore it is really 27%MUSP of the retailer. Likewise, the wholesaler markup is 25% on selling price of manufacturer. That mean s wholesaler cost. Hence the wholesaler markup is really 25% MUC. This clarification is important, since it will determine the correct markup formula to use! 42

43 Krispy Kreme Co This is the other typical markup problem. The bottom up situation! The retail selling price is $4.49 per box. Box is the unit. You cannot buy one doughnut. You have to calculate the manufacturer selling price in a channel that also includes the wholesaler Wholesaler markup on cost (25%) and retailer markup on selling price (27%) are also given. Let us go to the channel flow diagram, again! 43

44 KKC: Channel Flow Diagram KKC sells a box to wholesaler for $Y Wholesaler buys a box for $Y Wholesaler % markup on cost = 25% Wholesaler sells box for $X Retailer buys box for $X Retailer % markup on selling price = 27% Retailer sells box for $4.49 Consumer buys box for $

45 45 KKC: Channel Flow Diagram The key to correct application of markup information is to identify the formula that applies. Since retailer selling price is known, we shall proceed bottom up. Start with the retailer and $X. Ask the following questions. Is $X a cost or a selling price? The answer is cost Is selling price known? The answer is yes and it is $4.49 Is the % markup known and is it based on cost or selling price? The answer is yes, 27% and it is based on selling price Which markup formula enables calculation of cost when selling price and %markup sp are known? The answer is Formula 1 Formula 1, $cost=$sp*(1-%musp) = 4.49 * (1-.27) = $3.28 The retailer buys and the wholesaler sells for X=$3.28

46 KKC: Channel Flow Diagram Next consider the wholesaler and $Y. Ask the following questions. Is $Y a cost or a selling price? The answer is cost Is selling price known? The answer is yes and it is $3.28 Is the % markup known and is it based on cost or selling price? The answer is yes, 25% and it is based on cost Which markup formula enables calculation of cost when selling price and %markup cost are known? The answer is Formula 4 Formula 4, $cost=$sp/(1+%muc) = 3.28/(1+.25) = $2.62 The retailer buys and the manufacturer sells for Y=$2.62 Here is the completed channel flow diagram! 46

47 KKC: Channel Flow Diagram KKC sells a box to wholesaler for $2.62 Wholesaler buys a box for $2.62 Wholesaler % markup on cost = 25% Wholesaler sells box for $3.28 Retailer buys box for $3.28 Retailer % markup on selling price = 27% Retailer sells box for $4.49 Consumer buys box for $

48 KKC: Converting % Markups with the completed Channel Flow Diagram Look at the wholesaler (25% mu on cost) Their $ markup is $3.28 minus $2.62 = $0.66 This is 0.66/3.28=20.12% on selling price base The same answer is obtained using Formula 5: %musp = %muc/(1+%muc)» Therefore, % musp = 25%/(1+25%) = 20.00% The small discrepancy in the % answers is due to rounding error! Notice that again, %musp is less than % muc 48

49 KKC: Converting % Markups with the completed Channel Flow Diagram Look at the retailer (27% mu on selling price) Their $ markup is $4.49 minus $3.28 = $1.21 This is 1.21/3.28 = 36.89% on cost base the same answer is also got by using Formula 6: %mu on cost = % musp /(1-%musp)» Therefore %muc = 27%/(1-27%) = 36.99% The small discrepancy in the % answers is due to rounding error! Notice that again, %musp is less than % muc 49

50 KKC: Markup Chain Formulae Let us see how the markup chain works here. Retail selling price is $4.49 Apply the Retail markup of %musp = 27% Then the Wholesale markup of %muc = 25% We calculate USP KKC = {[$4.49*(1-27%)] /(1+25%)} = $2.62 Note that the computation inside the [ ] calculates the retailer cost, given their selling price (i.e. consumer cost) of $4.49. The retailer cost is the wholesaler selling price, but this is not explicitly calculated here, unlike the earlier example. Likewise, the computation inside the { }, calculates the wholesaler cost i.e. KKC selling price, from the just calculated wholesaler selling price, contained within the [ ]. Knowledge of the markup chain can shorten worksheets! Note that markup chains may also include $markup, not just %markup. 50

51 KKC: Markup Chain Formulae Again, let us see how it works in the opposite direction i.e. down the distribution channel. Say you know the KKC selling price of $2.62 per box. You want to calculate the retail selling price. Knowing the markup chain, this is done easily. Here, we first apply the wholesaler %muc and then the retailer %musp, correctly, in one step. USP retail = {[$2.62*(1+25%)] / (1-27%)} = $4.49 Note that the computation inside the [ ] calculates the wholesaler selling price, given the wholesaler cost (i.e. KKC selling price) of $4.49. The retailer cost is the wholesaler s selling price, but this is not explicitly calculated here, unlike the earlier example. Likewise, the computation inside the { }, calculates the retail selling price (consumer cost), from the just calculated retailer cost, contained within the [ ]. 51

52 Krispy Kreme Co: Excel Workbook Next, a simple Excel workbook to solve the KKC case. This time, YOU will input the basic information and compute the formulae under Outputs. Now, proceed to the workbook and solve it. Afterwards, compare your solutions with the solved sheet. Note that due to rounding, Excel and hand calculations may not match exactly! Did you do the markup chain correctly? Here are my cell formulae, for comparison purposes. if you have difficulties with any calculations. Format the cells and print your workbook. Make it look just like my solutions! Print cell formulae also from your workbook Make it look just like my formula printout! 52

53 Western Boot Company I am grateful to Professor Sam Gillespie for this case. Western Boot Company, Pair #1 Assume a pair of hiking boots are sold by the WBC, the manufacturer, to the wholesaler for $ The wholesaler takes a 25% markup on cost and sells to a retailer who takes a 40% markup on selling price. Determine the price of the shoes at the store. This approach is forward pricing Compute the dollar markup of each channel member Compute the % markup on selling price for the wholesaler and % on cost for the retailer. Here are the markup formulae. Use the workbook (pair 1) and solve on your own! Format the cells and print your workbook. Print cell formulae Afterwards, check my solutions and if needed, formulae! Did you do the markup chain correctly? 53

54 Western Boot Company Western Boot Company, Pair #2 Assume that WBC feels that their boot assortment could be improved by adding a pair that retails for $120. This time, let us assume that the wholesaler has a markup of 25% on retailer purchase price and the retailer has a 40% markup on wholesaler selling price. Determine WBC s selling price. The approach here is backward pricing It appears from the first paragraph that %muc = 25% for the wholesaler and %musp = 40% for retailer. Is this correct? Compute sp and cost for all channel members Compute the wholesaler's cost and wholesale markup $ Compute the retailer's cost and retail markup $ Compute the other %mu for the wholesaler and the retailer. Use the markup chain and travel up and down the channel. 54

55 Western Boot Company Western Boot Company, Pair #2 No, we have not, yet! 25% is wholesale %musp, NOT %muc. We are looking at the wholesaler. Retailer purchase price = wholesaler selling price. Likewise, it is %muc = 40% for the retailer. Remember, the markup formulae relate all 3 things: cost, sp and %mu of the same channel element. Available information should be reinterpreted in this manner. Use the workbook (pair 2) and solve on your own! Format the cells and print your workbook. Print cell formulae also. Afterwards, check my solutions and if needed, cell formulae! How about the markup chain? Did you do it correctly? 55

56 Western Boot Company Western Boot Company, Pair #3 Let's say WBC plans to add a new hiking boot to its product line which it can manufacture and sell to the wholesaler for about $ Wholesalers take a 33.33% markup on manufacturer selling price to and retailers take a 28.57% markup on consumer purchase price. Determine the retail selling price. Forward pricing again Compute sp and cost for all channel members Compute the wholesaler's cost and wholesale markup $ Compute the retailer's cost and retail markup $ Compute the other %mu for the wholesaler and the retailer. Use the markup chain and travel up and down the channel. 56

57 Western Boot Company Western Boot Company, Pair #3 Use the workbook (pair 3) and solve on your own! Then, check solutions and if needed, cell formulae! Format the cells and print your workbook. Make it look just like my solutions for Pair#3! Print cell formulae also from your workbook Make it look just like my formula printout for Pair#3! Did you do the markup chain correctly? Any connection between Pair#3 And Pair#2? 57

58 Baby Magic Inc. One last markup case! Print it! Solve the questions by hand. Use the markup formulae, if necessary! Likewise, interpret % markup correctly! Solve all the questions in your note pad. Show all steps, neatly! Check the answers on the following pages If your answers are incorrect, investigate why! 58

59 Baby Magic Inc. Here are my answers: Q1 Begin by calculating the Retailer Selling Price per tray Calculate the weighted average selling price of $0.47 per bottle o And then per tray = 12 bottles. Did you get $5.64/tray? Next, calculate the retailer s cost, given their %muc=30% 30% is on LW sp i.e. retailer cost! Hence, use F4 o 5.64/1.30 = $4.34. This is the retailer s cost = LWS sp LWS sells for $4.34 and buys for $3.44 per tray LW markup is $3.60 per carton of 4 trays i.e. 90 cents a tray! RWS sells for $3.44 and buys for $3.04 RW markup is $4.80 per bundle = 3 cartons = 12 trays! o i.e. markup = 40 cents a tray 59

60 Baby Magic Inc. Here are my answers: Q2 Single step answer is also $3.04, the RW cost = BMI SP Did you figure it out as 5.64/(1+30%) 3.60/4 4.80/(4*3)? Q3 Retailer markup is = $1.30 per tray %musp = 1.30/5.64 = 23.05%, %muc = 1.30/4.34 = 29.95% Q4 LWS markup is = $0.90 per tray %musp = 0.90/4.34 = 20.74%, %muc = 0.90/3.44 = 26.16% Q5 RWS markup is = $0.40 per tray %musp = 0.40/3.44 = 11.63%, %muc = 0.40/3.04 = 13.16% Note that Excel is more accurate and will differ 60

61 61 Baby Magic Inc. Next, do the same problem using Excel! Open the workbook and solve on your own. Input the case information Write formulae under output to compute. Here is my solution and cell formulae. Format the cells and print your workbook. Same as what you did earlier! Print cell formulae also from your workbook Same as what you did earlier!

62 Baby Magic Inc, reversed! Here is twist on the Baby Magic case! What if we were starting with the manufacturer, i.e. BMI, and figuring out the retail price? Here is the reversed case And its workbook, my solution and formulae. Format the cells and print your workbook. Same as what you did earlier! Print cell formulae also from your workbook Same as what you did earlier! 62

63 Markdowns Markdowns are commonly used by manufacturers, wholesalers and retailers. A markdown is a reduction from the originally marked price of an item to enable it to sell faster and get rid of the inventory. Markdowns are especially common in the fashion apparel industry to liquidate old stock and get ready for the new season and fashions. 63

64 64 Markdowns Markdowns are price discounts in dollars and cents; however, they are typically expressed as a percentage of net sales. Example: a retail store sells 75 shirts at $20 each and 25 more at $15 each. The $Markdown here for a shirt = $20-$15=$5 Since 25 shirts at sold at the discount, total $markdown = 25 * 5 = $125 And Net Sales Revenue = 75* *15 = $1,875. Therefore, Markdown % here is 125/1875 = 6.67% That is, divide the total $ amount of the discount by the net sales revenue Allowances (price adjustments after the sale, to keep the customer happy) are also typically included in calculating the markdown %. High markdown percentages, say in the case of specific departments, in a multiple department retail store, could indicate a problem: slow moving merchandise, excessive ordering etc.