1.4 Retail Calculations

Many retail calculations parallel the foregoing ratio calculations for profits and expenses.

When goods are bought for resale, a decision has to be made about the selling price of the individual articles. The goods are said to be marked up, the amount added to the cost of the goods being the markup.

Thus

Selling Price = Cost + Markup

 or

[latex]S = C+ M[/latex]

if S is used for selling price, C for cost and M for markup.

 This is similar to the calculation of gross profit for a company:

To simplify the process of finding markup for each product, it is common to apply the same fraction of the cost as that used for marking up all goods in the same category – for example, sports shoes.

[latex]Markup\; Ratio= \frac{Amount \;of \;Markup}{Cost\; of \;Goods}[/latex]

This ratio is usually written as a percent and called percent markup.

[latex]\% Markup = \frac{Markup}{Cost}\times 100\%[/latex]

For a markup ratio of 25% and goods that cost $20.00 per unit.

So

[latex]\text{Amount of Markup}= \text{(Markup ratio)} × \text{(Cost of Goods)}= 0.25 × \$20.00 = \$5.00[/latex]

And the selling price would be

[latex]S=C+M = \$20.00 +\$5.00 = \$25.00[/latex]

The $5.00 is also called the gross profit on the sale.

Note that, in general, markup ratios are based on cost prices and that margin ratios are based on sales or selling price. For the above example, if you wanted a margin ratio for the product, you would compare the $5.00 to the selling price of $25.00 and get

[latex]\text{Percent Gross Margin}= \frac{\$5}{\$25} = 0.20 = 20\%[/latex]

Since the percent markup is based on cost, which is known at the time goods are purchased, the normal way to calculate the increase is to use the percent markup method.

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