Business Math SLM W5

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Definition of Mark-on, Mark-up, and Markdown.

In precise usage of terms, mark-on refers to the difference between the original selling price and the cost of an item. For
example, if the original selling price of an item is ₱900 and the cost is ₱790, then, the mark on is ₱290. The selling price is
the market price that a product will be sold, while the cost is the actual price that the product was bought from the
manufacturer or wholesaler.
Many entrepreneurs, accountants, and even ordinary people refer to mark on as mark-up, initial mark-up, or original mark-
up. The mark-on is seldom used. For example, if the original price of the same item above increases to ₱1090 due to oil
price hike, the price increase of ₱190 is called the mark-up, which others would refer to as additional mark-up. A mark-up
is an increase in the original selling price. On the other hand, if the selling price is reduced to ₱840, the amount of price
reduction of ₱60 (₱900-₱840) is called the markdown. Thus, a markdown is a reduction in the original selling price.

● MARK-ON/ INITIAL MARKUP


Mark-on or initial mark-up must be well planned and must consider a business owner’s estimated sales, operating
expenses, price reduction, and profit objective.
Study these sample problems that involve finding the mark-on/ initial mark-up.

Example 1: If a 50g coffee refill pack costs ₱38.00 and the convenience store adds an initial mark-up of ₱7.50 for all items
it sells, what is the selling price for the coffee refill pack?
Solution:
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝐶𝑜𝑠𝑡 + 𝑀𝑎𝑟𝑘𝑜𝑛 𝑜𝑟 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝐶𝑜𝑠𝑡 + 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑀𝑎𝑟𝑘𝑢𝑝
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = ₱38.00 + ₱7.50 = ₱45.50
Thus, the selling price for the 50g coffee refill pack is ₱45.50.

Example 2: if the furniture dealer pays ₱11 950.00 for a kitchen cabinet and sells it for a mark-on of ₱1 355.90, what is
the rate of mark-on based on cost? Solution:

𝑅𝑎𝑡𝑒 𝑜𝑓 𝑀𝑎𝑟𝑘 − 𝑜𝑛 = 0.1135 𝑜𝑟 11.25%

Example 3: If a marketing student buys a loaf of bread for ₱36.50 and sells it for ₱45.00 during the marketing week, find
the rate of mark-on based on cost that she used.
Solution:
𝑀𝑎𝑟𝑘 − 𝑜𝑛 = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 − 𝐶𝑜𝑠𝑡
= ₱45.00 − ₱36.50 = ₱8.50

Therefore, the rate of mark on is 23.29%.

Example 4: What should be the selling price of a 300ml condensed milk in a can if it costs ₱57.00 and the retailer desires
to have a mark-on of 50% based on cost?
Solution:
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝐶𝑜𝑠𝑡(1 + 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑀𝑎𝑟𝑘 − 𝑜𝑛)
= ₱57.00(1 + 0.50)
= ₱57.00(1.50)
= ₱79.50
Thus, the selling price of a 300ml condensed milk in a can is ₱79.50.

Example 5: The mark-on/ initial markup for a 155g can of sardines in tomato sauce is ₱2.75, which represents a 20%
markon/initial markup based on cost. What is the cost of the canned sardines in tomato sauce? Solution:
𝐶𝑜𝑠𝑡 = ₱13.75
The cost of the canned sardines in tomato sauce is ₱13.75.

Example 6: A long-sleeved shirt is sold for ₱790. The rate of markon is 30% of the cost. Find the cost of the long-sleeved
shirt and the mark-on.
Solution:
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 100% + 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑀𝑎𝑟𝑘 − 𝑜𝑛
= 100% + 30%
= 130% 𝑜𝑟 1.30

𝑀𝑎𝑟𝑘 − 𝑜𝑛 = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 − 𝐶𝑜𝑠𝑡


= ₱790 − ₱609.69 = ₱182.31
The cost of the long-sleeved shirt is ₱609.69 with mark-on of ₱182.31

● MARKUP
Mark-up is the amount that a seller of goods or services charges over and above the total cost of delivering its product or
service in order to make a desired profit. For entrepreneurs in the process of starting a business, establishing mark-up is
one of the most important parts of pricing strategy. Mark-ups must be considerable enough to cover all predicted business
expenses and reductions (markdowns, stock shortages, employee and customer discounts) and still provide the business
with a good profit. The informed small business owner, then, is far more likely to arrive at a good mark-up price than the
business owner who has a flawed understanding of the company's likely sales, its total operating expenses—including
material, labor, and overhead costs—and its place in larger economic trends. Mark-ups vary enormously from industry to
industry. In some industries, the mark-up is only a small percentage of the total cost of the product or service. Companies
in other industries, however, are able to attach a far higher mark-up. Small appliance manufacturers can sometimes assign
mark-ups of 30 percent or more, while clothing is often marked up by as much as 100 percent. Even within industries,
mark-ups can vary widely. The automotive industry, for example, is usually limited to a 5-10 percent mark-up on new cars,
but it realizes a far higher profit in the hugely popular sports utility vehicle market, where mark-ups of 25 percent or more
are not unexpected.
Markup is obtained by getting the difference of the new selling price and the original selling price.

Example 7: What are the Mark-up and the mark-up rate if a retailer has increased the selling price of a can powdered milk
from ₱44.15 to ₱57.10?
Solution:
𝑀𝑎𝑟𝑘𝑢𝑝 = 𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 − 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
= ₱57.10 − ₱44.15 = ₱12.95

The markup and the markup rate are ₱12.95 and 29%, respectively.

Example 8: What was the original selling price of the furniture set you have purchased for ₱89 999 if there was a markup
rate of 15%?
Solution:
The formula for the original selling price was derived as follows:
𝑀𝑎𝑟𝑘𝑢𝑝 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 × 𝑀𝑎𝑟𝑘𝑢𝑝 𝑅𝑎𝑡𝑒
𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 + 𝑀𝑎𝑟𝑘𝑢𝑝
𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 + (𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 × 𝑀𝑎𝑟𝑘𝑢𝑝 𝑅𝑎𝑡𝑒)
𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒(1 + 𝑀𝑎𝑟𝑘𝑢𝑝 𝑅𝑎𝑡𝑒)
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 ÷ (1 + 𝑀𝑎𝑟𝑘𝑢𝑝 𝑅𝑎𝑡𝑒)
= ₱89 999 ÷ (1 + 0.15)
= ₱78 260
The original selling price of the furniture set that have been purchased is ₱78 260.

Example 9: What was the markup rate applied by a liquefied petroleum gas (LPG) dealer if she has increased the price of
an 11kg cylinder of LPG from ₱832 to ₱896?
Solution:
𝑀𝑎𝑟𝑘𝑢𝑝 = 𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 − 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
= ₱896 − ₱832
= ₱64
𝑀𝑎𝑟𝑘𝑢𝑝 𝑅𝑎𝑡𝑒 = 𝑀𝑎𝑟𝑘𝑢𝑝 ÷ 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
= ₱64 ÷ ₱832
= 0.0769 𝑜𝑟 7.69%

● MARKDOWN
Markdown is a reduction in the original selling price of an item due to several reasons. Before taking advantage of
markdowns offered by retailers, you should be aware of the reasons behind the offer and consider thoughtfully if you
really need the item.
Markdown is obtained by getting the difference of the original selling price and the new selling price. Unlike in the case of
markup, the new selling price is lower than the original selling price.

Example 10: Your apparel store usually offers items with markdowns at the end of the season. If the price of the slim fit
jeans was reduced from ₱1 299 to ₱999, what is the markdown? What is the markdown rate introduced by your store?
Solution:
𝑀𝑎𝑟𝑘𝑑𝑜𝑤𝑛 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 − 𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
= ₱1 299 − ₱999 = ₱300

= 0.2309 𝑜𝑟 23.09%

Example 11: What was the original selling price of a smart TV if it was purchased for only ₱43 199 at a marked down rate
of 30%?
Solution:
The formula for the original selling price can be derived as follows:
𝑀𝑎𝑟𝑘𝑑𝑜𝑤𝑛 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 × 𝑀𝑎𝑟𝑘𝑑𝑜𝑤𝑛 𝑅𝑎𝑡𝑒
𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 − 𝑀𝑎𝑟𝑘𝑑𝑜𝑤𝑛
𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 − (𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 × 𝑀𝑎𝑟𝑘𝑑𝑜𝑤𝑛
𝑅𝑎𝑡𝑒) 𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒(1 − 𝑀𝑎𝑟𝑘𝑑𝑜𝑤𝑛 𝑅𝑎𝑡𝑒) Thus, the formula for
the original price is given as:
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = 𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 ÷ (1 − 𝑀𝑎𝑟𝑘𝑑𝑜𝑤𝑛 𝑅𝑎𝑡𝑒)
= ₱43 199 ÷ (1 − 0.30)
= ₱61 712.86
The original selling price of a smart TV if it was purchased for only ₱43 199 is ₱61 712.86.

● MARKUP versus MARGIN


The difference between margin and markup is that margin is sales minus the cost of goods sold, while markup is the
amount by which the cost of a product is increased in order to derive the selling price. A mistake in the use of these terms
can lead to price setting that is substantially too high or low, resulting in lost sales or lost profits, respectively. There can
also be an inadvertent impact on market share, since excessively high or low prices may be well outside of the prices
charged by competitors.
- Margin (also known as gross margin) is sales minus the cost of goods sold. For example, if a product sells for ₱4
925.05 and costs ₱3 447.54 to manufacture, its margin is ₱1 477.51. Or, stated as a percentage, the margin percentage is
30% (calculated as the margin divided by sales).
- Markup is the amount by which the cost of a product is increased in order to derive the selling price. To use the
preceding example, a markup of ₱1 477.51 from the ₱3 447.54 cost yields the ₱4 925.05 price. Or, stated as a percentage,
the markup percentage is 42.9% (calculated as the markup amount divided by the product cost).

● GROSS MARGINS
Margin is defined as sales minus cost of goods sold. Gross margin is a way to measure the efficiency of a company using
its raw materials and labor in production process.
Gross margin may be assigned to a single product or an entire company. The higher the profit margin, the more efficient
a company is.

A margin can be derived by providing a mark up to product cost by a percentage higher than the amount of the margin.

The gross margin ratio is the ratio of gross margin expressed as a percentage of sales. It is an indicator of a company’s
financial health. It shows how much gross profit every peso of revenue a company is earning.

Let’s take for example a retailer who sells a product for ₱100 which had cost of
₱80, the margin is ₱20. The gross margin ratio expresses the margin amount as a percentage of sales. Thus,
Gross Margin Ratio = Margin ÷ Selling Price = 20÷100= 0.20 or 20%

Note: Markup is the difference between a product’s cost and selling price. In the same example, the product has a cost of
₱810 and it had a markup of ₱20 resulting in a selling price of ₱100. The mark up is ₱20 and the same margin of ₱20.
Nonetheless, the mark up percentage is expressed as a percentage of cost. Using the same example, the mark up
percentage is
Mark up Percentage = Markup ÷ Cost = 20÷80 = 0.25 or 25%

Gross margin is a company's net sales revenue minus its cost of goods sold (COGS). In other words, it is the sales revenue
a company retains after incurring the direct costs associated with producing the goods it sells, and the services it provides.
The higher the gross margin, the more capital a company retains on each dollar of sales, which it can then use to pay other
costs or satisfy debt obligations. The net sales figure is simply gross revenue, less the returns, allowances, and discounts.
The formula for gross margin is
𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 = 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 (𝑜𝑟 𝐶𝑂𝐺𝑆)
To illustrate an example of a gross margin calculation, imagine that a business collects ₱9 851 000.00 in sales revenue.
Let us assume that the cost of goods consists of the ₱985 100.00 it spends on manufacturing supplies, plus the ₱3 940
400.00 it pays in labor costs. Therefore, after subtracting its COGS, the company boasts ₱4 925 500.00 gross margin.
𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 = ₱9 851 000.00 − (₱985 100.00 + ₱3 940 400.00)
𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 = ₱9 851 000.00 − (₱4 925 500.00 )
𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 = ₱4 925 500.00

The gross margin represents the portion of each peso of revenue that the company retains as gross profit. For example, if
a company's recent quarterly gross margin is 35%, that means it retains 0.35 from each peso of revenue generated.
Because COGS have already been taken into account, those remaining funds may consequently be channeled toward
paying debts, general and administrative expenses, interest fees, and dividend distributions to shareholders.
Companies use gross margin to measure how their production costs relate to their revenues. For example, if a company's
gross margin is falling, it may strive to slash labor costs or source cheaper suppliers of materials. Alternatively, it may
decide to increase prices, as a revenue increasing measure. Gross profit margins can also be used to measure company
efficiency or to compare two companies of different market capitalizations.
While gross margin focuses solely on the relationship between revenue and COGS, the net profit margin takes all of a
business's expenses into account. When calculating net profit margins, businesses subtract their COGS, as well as ancillary
expenses such as product distribution, sales rep wages, miscellaneous operating expenses, and taxes.
Gross margin--also called "gross profit margin", helps a company assess the profitability of its manufacturing activities,
while net profit margin helps the company assess its overall profitability.

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