ESTABLISHING RETAIL PRICES

By ZERRR ARRRRMZ
SCOPE AND SEQUENCE

 Learning Objectives
 Introduction
 Definition of Terms
 Mark On
 Mark Down
 Mark Up
 Practice Exercises
 LEARNING OBJECTIVES
 At the end of the chapter, the students should be able
to:
 Understand the meaning of establishing retail prices.
 Define terms used in establishing retail prices.
 Derive the formulas used in establishing retail prices.
 Apply these formulas to solve different sample problems.
 Practice skills in solving problems involving establishing retail
prices.
 Appreciate the importance of establishing retail prices.
INTRODUCTION

 People go into business because they have some goods to offer

the public for sale, or because they can render some services
other people need. In the process these businessmen make
profits. Operating a retail store successfully is not an easy
thing to do. The retail store owner performs all the basic
functions of an enterprise – buying, financing,
pricing, selling and servicing. These functions are by no
means easy to many people who lack entrepreneurial ability,
running a retail store might prove a disaster. Hundreds and
thousands of business close shop every year because their
owners are not making profits.
 overhead costs.
 A businessman has to worry about his sales. If he
does not have enough sales, then he is in big trouble.
Among other things, a successful retailer must know
how to price his goods.
 He must set prices high enough to cover
different costs. First, he must consider his operating
costs. These include expenses like wages, rentals,
insurance, depreciation, light and water, and
utilities. These costs are also called overhead costs.
selling costs.
Second, he must consider his
selling costs. These include
expenses like freight charges,
transportation expenses, tips,
display, mail and others.
 And finally, he must consider the profit
he must derive to reward his efforts and
risks and to keep his business going.
 In a business, traditional accounting profit is
calculated by subtracting costs and expenses from
sales revenue for a specified period. Determining a
suitable selling price for each product or service is
crucial for long-term sustainability. Some firms use a
cost plus methodology, marking up the cost of each
product or service by a certain percentage that is
large enough to cover expenses and still leave a
respectable profit. Other organizations select their
desired profit percentages first, and then work
backwards to set their prices.
 The supply chain defies the channels or stages that a
product passes through as it is converted from a raw
material to a finished product purchased by the consumer.
This process is outlined below:

Manufacturer – Wholesaler –
Distributor – Retailer –
Consumer
 DEFINITION OF TERMS

 Overhead costs. These are expenses like wages, rentals, insurance,

depreciation, light and water, and utilities.
 Selling costs. These are expenses like freight charges, transportation
expenses, tips, display, mail and others.
 Selling price. It covers the cost of buying the goods, the operating
expenses (or overhead) of the business, the profit required by the owner
to stay in business (Cost of buying + Expenses + Profit).
 Mark on. The difference between the selling price of goods and the
cost of goods. It is sometimes referred to as profit.
 Markdown. The practice of reducing the regular selling price
 Markup. The amount by which the regular selling price is increased.
 Establishing Retail Prices
 𝑀𝑂 = 𝑀𝑎𝑟𝑘 𝑂𝑛
 𝑀𝐷 = 𝑀𝑎𝑟𝑘 𝐷𝑜𝑤𝑛
 𝑀𝑈 = 𝑀𝑎𝑟𝑘 𝑈𝑝
 𝑆𝑃 = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
 𝑁𝑆𝑃 = 𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
 𝐼𝑆𝑃 = 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
 𝑂𝐶 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝐶𝑜𝑠𝑡
 𝑂𝑆𝑃 = 𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
 𝑃𝑆𝑃 = 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
 𝑀𝑜𝑟 = 𝑀𝑎𝑟𝑘 𝑂𝑛 𝑅𝑎𝑡𝑒
 𝑀𝑑𝑟 = 𝑀𝑎𝑟𝑘 𝐷𝑜𝑤𝑛 𝑅𝑎𝑡𝑒
 𝑀𝑢𝑟 = 𝑀𝑎𝑟𝑘 𝑈𝑝 𝑅𝑎𝑡𝑒
MARKON

 The difference between the selling price of an article and the

cost o the article is called markon.
 Mark on Rate
𝑀𝑂 𝑀𝑂
𝑀𝑜𝑟 = 𝑥100% 𝑂𝐶 =
𝑂𝐶 𝑀𝑜𝑟
 Mark On
𝑀𝑂 = 𝑆𝑃 − 𝑂𝐶
𝑀𝑂 = 𝑀𝑜𝑟 𝑥 𝑂𝐶 P=rate x Base
 Selling Price Original Cost
𝑆𝑃 = 𝑂𝐶 + 𝑀𝑂 𝑂𝐶 = 𝑆𝑃 − 𝑀𝑂
𝑆𝑃
𝑆𝑃 = 𝑂𝐶(1 + 𝑀𝑜𝑟) 𝑂𝐶 =
(1+𝑀𝑜𝑟)
𝑃 = 𝐵(1 + 𝑅)
 Markon Based on Cost
Many retailers, however, express markon as a percent or fraction of
the cost of goods to be sold. This markon varies from one store to another,
product to product. Thus, Mrs. Marquez may decide to apply a markon of 30%
on clothes, or 35% on cosmetics, etc.

Example:
One line of women’s bra cost Mrs. Marquez P50.00 each. At what
price should each dress be marked for sale if she wants to realize a 30% markon
based on the cost?
Solution:
Given: P50.00 = cost of bra OC
30% = markon MoR
 Since the markon is 30% of the cost of P50.00, the markon is computed by
multiplying P50.00 by 30%. Thus,
Markon = Cost of Goods x Markon rate 𝑀𝑂 = 𝑀𝑜𝑟 𝑥 𝑂𝐶
 = P50.00 x 0.30
 MO= P15.00
 Markon Based on Cost
The selling price is obtained by adding the markon to the cost of
the product.
Selling Price = Cost of Goods + Markon
𝑆𝑃 = 𝑂𝐶 + 𝑀𝑂
= P50.00 + P15.00
𝑆𝑃 = P65.00
We must realize, however, that the costs of transportation,
such as freight and trucking charges, and other operating expenses
are part of the cost of the product because these are considered
essential parts of the cost of the goods.
 Markon Based on Selling Price
 We mentioned before that many retailers express markon
as a percent or fraction of the costs of the goods to be sold.
Other retailers, however, prefer to state markon as a percent or
fraction of selling price. What are the differences of the two
practices? Let us illustrate by the following example.

 If, for example, a retailer buys a commodity for P80.00 and

sells them for P100.00, his markon must be stated as 25% over
cost (P100 – P80 = P20 ÷ P80 = 0.25 0r 25%). If he states the
same markon (i.e. P20) as a percent of the selling price, the
markon rate is only 20% (P20; P20 ÷ P100 = 0.20or 20%)
 Example 1:
An article costs P40.00 and sells for P55.00. Find the percent of markon based on the
selling price.

Solution:
Given: Selling price – P55.00
Cost price – P40.00

Markon = Selling Price – Cost Price

𝑀𝑎𝑟𝑘𝑜𝑛 𝑀𝑂
Markon Rate = 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 𝑀𝑜𝑟 = 𝑥100%
𝑆𝑃

= P55.00 – P40.00
= P15.00

𝑃15.00
= 𝑃55.00

= 27.3%
 Example 2:
Find the amount and the percent of markon based on the
cost price if an article costs P20 and sells for P30.
Given: Selling Price – P30
Cost Price – P20
 Solution:
Markon = Selling Price – Cost Price
𝑀𝑎𝑟𝑘𝑜𝑛
Markon Rate =
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
= P30 – P20
𝑃10
=
𝑃30
= P10
= 33.3%
Other Problems

1. What is the original cost of the product if it

sells to P9,550 at a mark on rate of 15%
based on the cost?

2. A merchandise was marked on by 20%

now priced P1, 650, how much is the original
cost of the merchandise and its mark on?
 MARK DOWN

 Sometimes, wholesalers or retailers reduce prices

on various items in their stores. Among the
reasons given are: to attract more sales, to meet
the prices of competitors, to clear the store of old
stocks or of merchandise that is not selling well.
Another way of clearing the stores of old stocks is
to sell at bargain prices during special occasions
like Christmas sale, inventory sale, clearance sale.
The practice of reducing the regular selling price
is called a markdown.
 Mark Down Rate
𝑀𝐷
𝑀𝑑𝑟 = 𝑥100%
𝑂𝑆𝑃

 Mark Down
𝑀𝐷 = 𝑂𝑆𝑃 − 𝑁𝑆𝑃
𝑀𝐷
𝑀𝐷 = 𝑀𝑑𝑟 𝑥 𝑂𝑆𝑃 𝑂𝑆𝑃 =
𝑀𝑑𝑟

 New Selling Price Original Selling Price

𝑁𝑆𝑃 = 𝑂𝑆𝑃 − 𝑀𝐷 𝑂𝑆𝑃 = 𝑁𝑆𝑃 + 𝑀𝐷
𝑁𝑆𝑃
𝑁𝑆𝑃 = 𝑂𝑆𝑃(1 − 𝑀𝑑𝑟) 𝑂𝑆𝑃 =
(1−𝑀𝑑𝑟)
 We can show how to compute for the markdown through
the following example.
Example 1:
Harry Lim, a retail store owner offered for sale at P110 for
goods that were originally priced at P160. Find the: (a) the markdown,
and (b) the percent of the markdown.

Solution:

To find the markdown, we have:

Markdown = Original Selling Price – New Selling Price
𝑀𝐷 = 𝑂𝑆𝑃 − 𝑁𝑆𝑃
= P160 – P110
= P50
To find the markdown rate, we divide the amount of markdown by
the original selling price.
𝑀𝑎𝑟𝑘𝑑𝑜𝑤𝑛
Markdown Rate =
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
𝑃50
=
𝑃160
= 0.3125 or 31.25%
Example 2:
A dozen of socks now priced P750 after a of 30% marked down rate was
applied. How much was the original price of the socks and savings for those who
will buy?
Given: NSP= P750
MdR= 30%

Solution:
To find the Original Selling Price OSP, we have:
𝑁𝑒𝑤 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
Original Selling Price =
(1−𝑀𝑎𝑟𝑘𝑑𝑜𝑤𝑛 𝑟𝑎𝑡𝑒)
𝑁𝑆𝑃
𝑂𝑆𝑃 =
(1−𝑀𝑑𝑟)
𝑃750.00
=
(1−0.3)
=P1, 071.43

To find the savings as its markdown rate, 𝑀𝐷 = 𝑂𝑆𝑃 − 𝑁𝑆𝑃

𝑀𝐷 = P1, 071.43 − 𝑃750.00
= 𝑃321.43
 MARKUP
 With the way prices change nowadays, it is not
an uncommon occurrence for retailers to raise
their prices. From an original retail price, a retailer
may raise the regular selling price of his remaining
stock because of a prescribed increase in price. The
amount by which the regular selling price is
increased is called markup.
 Mark Up
 Mark Up Rate
𝑀𝑈
𝑀𝑢𝑟 = 𝑥100%
𝑃𝑆𝑃

 Mark Up
𝑀𝑈 = 𝐼𝑆𝑃 − 𝑃𝑆𝑃
𝑀𝑈
𝑀𝑈 = 𝑀𝑢𝑟 𝑥 𝑃𝑆𝑃 𝑃𝑆𝑃 =
𝑀𝑢𝑟

 Increased Selling Price Previous Selling Price

𝐼𝑆𝑃 = 𝑃𝑆𝑃 + 𝑀𝑈 𝑃𝑆𝑃 = 𝐼𝑆𝑃 − 𝑀𝑈
𝐼𝑆𝑃
𝐼𝑆𝑃 = 𝑃𝑆𝑃(1 + 𝑀𝑢𝑟) 𝑃𝑆𝑃 =
(1+𝑀𝑢𝑟)
 The following examples will show how this term is being
used.
Example 1:
A commodity originally tagged at P32.70 is now being sold for
P40.00. Find: (a) the markup, and (b) the markup rate.
Solution:
Given: P32.70 – Previous Selling Price
P40.00 – Increased Selling Price

a) Markup = Increased Selling Price – Previous Selling Price

= P40.00 – P32.70
= P7.30
𝑀𝑎𝑟𝑘𝑢𝑝
b) Markup Rate =
𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
𝑃7.30
=
𝑃32.70
= 22.3 %
Sometimes retailers term previous selling price as regular selling price
and the increased selling price as new selling price.
Example 2:
Fairmart is increasing the selling price of belts from P75.00 to
P90.00. What is the percent of markup?
Solution:
Given: P75.00 – regular or previous selling price
P90.00 – new or increased selling price
Markup =Increased Selling Price – Previous Selling Price
= P90.00 – P75.00
= P15.00
𝑀𝑎𝑟𝑘𝑢𝑝
Markup Rate =
𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒
𝑃15
=
𝑃75
= 0.20 𝑜𝑟 20%
 Mark On
1. An item originally cost P1,250 was marked on by 15%, How much is the mark on and selling
price?
2. How much is the mark on if a merchandise cost is P3, 450 now on desk costing P5,450. What
is the mark on rate?
3. How much is the original cost of entertainment set if the selling price is PP25, 600 after a
marked on 8.5% was realized?
 Mark Down
1. A customer saved P495.00 after buying an offer for an electric fan which was sold on buy 1
take 1 originally priced P1,499.00 each? How much is the selling price and what is the mark
down rate?
2. A washing machine now on sale for 30% off. If the new price is P11,399.00 how much is the
original price and mark down?
 Mark Up
1 An entrepreneur took advantage to increase by 30% a bag of onions now sold for P5,550.00.
How much is the amount increase and what is the original price of each bag?