Markup As A Merchandising Tool

Markup as a Merchandising Tool 

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It is the major tool used when pricing merchandise. Markup serves as a guide in pricing merchandise and in providing the desired operating profit Markup is the amt added to the cost price in order to establish the retail price. The calculation of markup on retail provides retailers to plan prices, stock, and sales in retail values.

Markup RETAIL -COST OR -------------= MARKUP

RETAIL -MARKUP --------------= COST

COST OR + MARKUP -------------= RETAIL

Calculating markup% based on retail 

When markup % is based on retail, retail always equals 100.

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Markup % based on retail= markup -------------- x 100 retail

Calculating markup% based on retail What is the markup % for a dress that costs $40 and retails for $80?  Markup % based on retail= markup -------------- x 100 retail = ($80-$40) / $80 x 100 = 50%

Calculating markup% based on cost 

Markup based on cost price is some times used by small independently owned stores.

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Markup % based on cost = markup -------------- x 100 cost

Calculating markup% based on cost 

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A man’s suit retails for $210 and costs $120. What is the markup% based on cost ? Markup % based on cost = markup -------------- x 100 cost = ($210-$120) / 120 x 100 = $90/$120 x 100 = 75%

Comparison of markup based on cost and retail Compare the mark up % ‘s when based on retail and on cost for a blouse that costs $24 and retails for $40? Based on retail Based on cost ------------------------------------------------16/40 = 40% 16/24 = 66.67% 

Problems 1. 2.

3. 4.

Find the cost of the dress that retails for $185 and has a 55% markup? Hand tooled belts for the men’s department cost $180 a dozen. If a 47.5% markup is required what unit retail would achieve this markup? What retail price in a walnut watch set that costs $2500 would provide a 58% markup? Determine the markup% on a child’s hand smocked dress that costs $45 and retails for $110?

Problem 5. A buyer of men’s furnishings paid $168 per dozen for jute belts. What unit retail will provide a 52.25% markup?

Markup % on a group of items 

To compute the markup % on an entire order(merchandise with varying cost and/or retail values), determine the total cost and the total retail , then subtract to determine total markup dollars.

Example Find the markup % on the following order. Quantity $ cost $ retail ----------------------------------------------------------14 skirts 20 each 45each 25 blouses 18 each 40 each 10 belts 16 each 30 each Find total cost and total retail Total cost = $890 Total retail = $1,930 Find total markup amt 1930-890 =$1,040 Markup% = $markup/ $retail x 100 =1040/1930 x 100 

Problems 

Find the markup % on this order which a buyer purchased for sale: 100 hand towels costing $22.80/dozen to sell at $3.50 each. 9 2/3dozen washcloths costing $1.20 each to sell at $2.10each. 85 bath towels costing $4.25 each to sell at $8.00 each 2 ¼ dozen beach towels costing $5.50 each to sell at $10.98 each.

Problems 

The buyer needs a group of t-shirts for a special sale he buys 40 dozen at $84/dozen, 20 dozen at $96/dozen and 15dozen at $120/dozen. If he marks them all at a sale price of $18.00 each, what markup % is realized on the merchandise?

Initial Markup 

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The first price placed on the merchandise for resale is its Original Retail. The price received when it sells which may be different , is its final selling price. Initial Markup – is the difference between the billed cost (where inward freight charges are known in advance,they are added to the billed cost before calculating initial markup) and the first retail price placed on a given item,or a lot of goods.This figure can be planned in advance. Original retail price = $12,000 (minus) Billed cost = $ 5,500 --------------------------------------------------------Initial $markup = $ 6,500 INITIAL MU% =6,500/12,000 X 100 = 54.2%

INITIAL MARKUP  

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The markup that is placed on the merchandise as it is received into the store is initial markup. However this is not to imply that the markup placed on the merchandise when it first enters the store will be same markup achieved when the goods are sold.the retailer quickly becomes aware that the first markup placed on the is hoped for. That markup ‘hoped for ‘ is called initial mark up. The markup actually achieved is called ‘maintained markup’ Initial MU should be large enough to to cover expenses and reductions to provide a profit. A loss will occur if the initial markup does not cover expenses and reductions.

Components of initial markup 1. 2.

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Operating expense. The anticipated reductions in the retail value of the inventory— a. markdowns b.expected inventory shortages. c.sales discounts to employees. A satisfactory return—profit Alteration costs- installation of carpeting,hemline of men’s trouser, repair of damaged inventory. This increases the value of the retail price Cash discount represent a reduction in the cost of merchandise.

Initial Markup% Initial Markup % = Expenses + Profit +Reductions +Alterations-Cash discount -------------------------------------------x 100 Net sales + Reductions 

Example 1 

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Determine the necessary initial markup for a dept having these planned figures. Net sales $100,000 Expenses 40,000 Reductions 10,000 Alteration cost 900 Cash discount 750 Profit 5,000

Solution1 Ini MU%= exp+prof+Redu+Alter+cd ------------------------------------x100 net sales + reductions 40,000 + 5,000 + 10,000 +900 – 750 = ------------------------------------------------100,000 + 10,000 55,150 = ---------= 50.14% 110,000

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Example 2 

Calculate the initial markup % that will enable the dept to achieve a 9% profit. net sales $220,000 markdowns 4% employee discounts 2,100 shortages 1,900 expenses 95,000 profit 9% Cash discount 5,400 Alteration costs 2,600

First determine the markdown and profit dollars: markdowns = 4% of net sales = $8,800 profit = 9% of net sales = $19,800 reductions = Employee discounts +markdowns +shortage =$2,100 +$8,800 +$ 1,900 =$11,800 Initial MU% exp+prof+Redu+alte-cd = --------------------------------x 100 Net sales + reductions 95,000 +19,800 +11,800 +2,600 –5,400 =--------------------------------------------------- x100 220,000 + 11,800 = 124,800 / 232,800 x 100 = 53.61% 

Problem 1 3. What should be the initial markup% in a dept having these planned figures? net sales $420,000 expenses 38% markdowns 8,500 alteration costs 950 shortages 2,500 cash discount 1,600 employee discounts 1,900 profit 8%

Problem 2 1.

Determine what initial markup % will be required to achieve a 4.25% profit. expenses 42.0% markdowns 2.8 alteration costs 0.2 shortages 1.0 cash discount 0.3 employee discounts 0.5

Maintained Markup 

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It is the final markup obtained by a retail store when the merchandise is sold. It is based on actual sale of goods rather than on planned sales. It is the difference between gross cost of goods sold and the actual retail price obtained(net sales).

Maintained markup 

Maintained markup $ = net sales minus gross cost of goods sold

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Maintained markup% = maintained markup$ ------------------------------ x 100 net sales

Determine the maintained MU% Net sales $250,000 Cost of merchandise sold: Opening inventory Gross purchases Less returns to vendors

$35,000 $155,000 - 7,500 -----------

Net purchases Freight inward Total merchandise handled Closing inventory Gross cost of merchandise sold Cash discount earned Net cost of merchandise sold Net alteration/workroom costs Total cost of merchandise sold Gross margin

$147,500 + 3,500 ---------$186,000 - 41,000 ---------$145,000 - 8,000 ---------$137,000 + 2,500 ----------139,500 ------------$110,500

Solution 1 

Maintained markup $ = net sales – gross cost of merchandise sold = $ 250,000 - $ 145,000 =$105,000 Maintained markup% = maintained MU $ ---------------------- x100 net sales = $ 105,000 / $ 250,000 x 100 = 42%

Maintained markup 

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Retail reductions (markdowns, shortages, and discounts) reduce the value that can actually be achieved or hope to achieve. Maintained markup is based on results and is usually figured on the activity of an entire classification, dept or the store for a given period of time rather than on an individual purchase or few items.

Maintained markup 

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It is calculated whenever an operating statement(p&l) is prepared and is reported as a % of net sales and does not reflect deductions for cash discounts and workroom costs. Maintained markup is more meaningful % than initial markup because it is an accurate reflection of actual business.

Maintained MU and Gross Margin 

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Maintained markup and gross margin both represent the markup achieved the merchandise is sold. Both % are based on the net sales figure rather than on original prices. Maintained MU differs from Gross Margin in that gross margin takes into consideration cash discounts and alteration/workroom costs.

How to calculate gross margin with maintained markup Gross Margin $ = Net sales – Total cost of merchandise sold

Gross Margin % = Gross Margin $ ------------------- x 100 net sales

Net sales Cost of merchandise sold: Opening inventory Gross purchases Less returns to vendors

$250,000 $35,000 $155,000 - 7,500 -----------

Net purchases Freight inward Total merchandise handled Closing inventory Gross cost of merchandise sold Cash discount earned Net cost of merchandise sold Net alteration/workroom costs Total cost of merchandise sold Gross margin

$147,500 + 3,500 ---------$186,000 - 41,000 ---------$145,000 - 8,000 ---------$137,000 + 2,500 ----------139,500 ------------$110,500

Using the above example to calculate Gross Margin Gross Margin $

= Net sales – Total cost of merchandise sold =$250,000 - $139,500 =$110,500

Gross Margin % = Gross Margin $ ------------------- x 100 net sales =$ 110,000 / $ 250,000 x 100 =44.2%

Problem 1- Calculate Maintained MU% and GM% for a Dept       

Net sales $320,000 Opening inventory 85,000 Closing inventory 105,800 Net purchases 185,000 Freight inward 3,800 Cash discount 5,400 Alteration costs 2,100

Cumulative Markup 

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Cumulative markup is the average markup resulting from the beginning inventory and the purchases received during a specified period. Cumulative markup is calculated from season to date basis. It is an average figure because it is the markup on merchandise that has accumulated over a period of time . Total value of the goods handled is calculated by adding beginning inventory and net purchases throughout the period.total merchandise handled must be cal at retail and at cost in order to find cumulative MU%

Cumulative Markup 

Cumulative markup% = $ Cumulative markup ----------------------------- x 100 $ cumulative retail

Example 1 

The shoe dept showed an opening inventory of $80,000 at retail with a markup of 48%. During the month, purchases were received in the amt of $30,000 at cost that were marked up 52%. Find the cumulative markup% for the dept.

Opening Purchases Total Merchandise Inventory Handled -----------------------------------------------------------------Retail $80,000 $62,500(a) $142,500(c) Cost $ 41,600(b) $30,000 $71,600(d) Markup% 48% 52% 49.75%(e) g) Find the retail value of purchases = $62,500 h) Find the cost value for the opening inventory = $41,600 i) Find the total value of retail value of all goods handled = $142,500 k) Find the total cost value of goods handled = $71,600 l) Markup% on the total goods handled. $Markup = $ 142,500 - $71,600 = $ 70,900

Problem 1 

A sporting goods store had an opening inventory of $42,000 at cost and $95,000 at retail. Purchases during the month totaled $64,000 at cost and $ 138,000 at retail. Determine the cumulative markup%

Average Markup 

Buyers must be able to determine the markup % needed on the balance of purchases in order to achieve the planned markup goal(an Average).

Example 

A buyer for a children`s dept needs $12,000 worth of merchandise at retail for the month. She has already purchased 200 dresses that cost $18.00 each and will retail for $30.00 each.what markup% must she obtain on the remaining purchases in order to average a 54% markup for the month?

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First ask what are you trying to find? Markup% on the balance.

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% Total needs Purchases Balance --------------------------------------------------------------------------Retail 100% $12000 200 at $30 (b) $6000 (d) $6000 Cost 46% (a) $5,520 200 at $18 (c) $3600 (e) $1920 Markup 54% (f) 4080 (h) Find total needs at cost = $5520 (i) Find retail value of purchase = $6000 (j) Find cost value of purchase = $3600 (k) Find the balance retail = $6000 (l) Find the balance cost =$ 1920 (m) Find the markup % needed on the balance = retail balance – cost balance / retail balance x 100

Problem1 

A sportswear buyer needs to average a 48% markup. He needs 120 skirts to retail at $21.00 each and 80 jackets to retail at $38.00 each. If he pays $20.00 for each jacket, how much can he pay for each skirt in order to achieve his planned markup %?

Problem 2 

A buyer plans to purchase 300 pairs of slacks for an Anniversary sale to retail for $26.00 each. The buyer has already placed an order for 170 pairs at $12.00 each (cost). What is the most he can pay for each remaining pair of slacks if he is to achieve the dept’s markup goal of 52%?

Problem 3 

A buyer for the men’s dept purchased a group of shirts that consisted of 10 shirts at $11.00 each; 20 shirts at $12.00 each; and 12 shirts at $14.00 each. He plans to sell all the shirts at the same price. What unit retail price will result in a 58% markup.