BUYING AND SELLING

LEARNING OUTCOMES: Analyze and solve problems on important factors in managing a

business: buying products and selling products.

LESSON OBJECTIVES At the end of the lesson, the students should be able to:

1. define cost, initial markup or mark-on, additional markup, markup cancellation, and mark-
down;

2. differentiate markup and margin;

3. compute for markup based on cost;

4. compute for markup bsed on selling price; and

5. convert markup based on cost to markup based on selling price and vice versa.

Defintion of Terms:

Definition 1. COST
Cost refers to the purchase price of an article.

Example:
If a trader bought a product for P 100,00, this is the cost of the product as far as the trader is
concerned.

Definition 2. INITIAL MARKUP OR MARK-ON

Initial markup or mark-on refers to the amount added to cost to arrive at the original selling
price. It is, someimes, referred to as margin. In other words, it is the difference between the original
selling price and the cost.

Example:
In the example above, if he/she marked the merchandise he or she bought for P 100.00 to sell
at P 120.00, the P 120.00 is the original selling price and the P 20.00 he/she added to his cost of
P 100.00 is the initial markup or mark-on.

Illustration:
Cost.............................................................. P 100
Plus: Intial Markup or mark-on..................... P 20
Original selling price.......................................P 120.00

Definition 3. ADDITIONAL MARKUP

Additional markup refers to amounts added to original selling price to arrive at a new selling
price.

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Example:
In our example, if the trader decides to increase his/her selling price from P 120.00 to P 150.00,
the new selling price, then the P 30.00 he/she added to the original selling price of P 120.00 is the
additionl markup or markup only.

Illustration:
Original Selling Price......................................... P 120
Plus: Additional Markup .................................... P 30
Newl selling price.................................................P 150.00

Definition 4. MARKUP CANCELLATION

Markup Cancellation refers to the decrease in the new selling price that does not decrease it
below the original selling price.
Example:
If the trader in our example saw that his/her new selling price of P150.00 is not appealing to
customers, he/she may decide to lower his/her price. As long as the new lowered price does not
go below the original selling price he/she has priviously set, the price reduction shall be termed as
markup cancellation.

Illustration:
New Selling Price.................................................. P 150
Less: Markup Cancellation .................................... P 10
Reduce Selling Price ............................................. P 140
Less: Markup cancellation..........................................P20
Original Selling Price ............................................ P 120

Definition 5. MARKDOWN
Markdown refers to reduction in the original selling price.
Example:
If the trader in our example reduces his/her selling price from P 120 ( original selling price) to
P 115.00, the P 5.00 ( P120.00-P115.00) reduction in selling price is termed markdown. If he/she
decides further to reduce it to P 110.00, the P 10.00 ( P120.00-P110.00) reduction in selling price
is markdown.

Illustration:
Original Selling Price.................................................. P 120
Less: Markdown ............................................................ P 5
New reduce Selling Price ............................................ P 115
Less: Markdown.................................................................P5
New reduced selling price ............................................ P 110

Difference between Markup and Margin

Margin ( also known as gross margin) is sales minus the cost of goods sold. Gross margin is
easier to arrive at and is, therefore, easier to use as well.
Example:

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 If a profit sells for P 200.00 and costs P 140.00 to manufacture, its gross margin is P 60.00.
Stated as a percent, the margin is 30% ( calculated as the margin divided by sales). This is the
Markup based on sales or selling price.
Markup is the amount by which the cost of a product is increased in order to derive the selling
price.

Example:
From the example above, a markup of P60.00 to the P140.00 cost yields the P 200.00 selling
price. Stated as a percentage, the markup percentage is 42.86% (calculated as the markup amount
divided by the product cost). This is the markup based on cost.

Therefore, the margin is addressing the profit as it relates to selling price; whereas, the markup
addresses the profit as it relates to cost price.

M argin M arkup
M arkup based on Sales M arkup based on Cost
Cost P 140 70% 100.00%
M arkup P 60 30% 42.86%
SellingP rice P 200 100% 142.86%

Markup Based on Cost

The difference between the sales ( selling price) and cost of goods sold or cost of sales ( cost) is
the gross profit or margin, which is also the markup.

Sales Selling Price ..................................................................P 450

Cost of goods sold (cost).........................................................P 300
Gross Profit (markup) ............................................................P 150

The markup in percent could be expressed as either based on cost or based on selling price.
Markup is based on cost if cost is taken as 100%, it being the base. As such, to express the markup
in terms of percent based on cost,

Sales Selling Price .................................................P 450 150%

Cost ........................................................................P 300 (100%)
Markup ..................................................................P 150 (50%)

To get the corresponding percent for selling price and the markup, we use cost as the base:

P
R=
B
SellingP rice
Selling price as % of cost =
Cost
P 450
=
P 300
=1.5 = 150%

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 M arkup
Markup as % of cost =
Cost
P 150
=
P 300
1
=
2
=.5 = 50%

If a seller, therefore, knowing the cost of the merchandise that he/she is selling wants a certain
percent of markup based on his/her cost, he/she can determine at what price he/she is to sell
his/her merchandise. For example, if he/she purchased a particular merchandise for P 200.00 and
he/she wants a 30% markup based on cost, his/her selling price would be:

Selling Price .................................................P ? 130%

Cost .......................................................... (200) (100%)
Markup ....................................................... ? (30%)
Selling price = P 200 x 130%
= P 200 x 1.3
= P 260

Hence,

Selling Price .................................................P 260 130%

Cost .......................................................... (200) (100%)
Markup ....................................................... P 60 (30%)

To prove both our selling price and our markup,

Selling Price = Cost + Markup

= Cost + (Cost x Markup rate bsed on cost)
= P 200 + ( P 200 x 30%)
= P 200 + 60
= P 260

From the above, we see that our selling price is P 260.00 and our markup is P 60.00 which prove
our prevous computation.

Markup Based on Selling Price (Margin)

In most instances, however markup is expressed as a percent of selling price. In this case, the
selling price is the base, hence, 100

Selling Price ..................................................................P 450 100.00%

Cost .............................................................................(300) (66.67%)
Markup) .......................................................................P 150 33.33%%

To express the cost and the markup in percent, the selling price is used as the base:

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 P
R=
B
Cost
Cost as % of selling price =
Selling P rice
P 300
=
P 450
2
=
3
= 66.67%
M arkup
Markup as % of selling price =
Selling P rice
P 150
=
P 450
1
=
3
=33.33%

You will notice that the markup, if stated in terms of selling price as the base, is lower ( 33.33%)
as against markup based on cost ( 50%) although our markup in pesos remains the same ( P 150.00).
This is the primary reason why traders usually express their markup based on selling price to make
it appear that they have lower markup or gross profit.

If a trader, therefore, wants a 30% markup based on selling price, he/she deduct 30% from 100%
to get his/her cost as a rate of selling price, which is equal to 70%. He/she can then determine
his/her selling price. Let us assume his/her cost is P 200.00.

Selling Price ..................................................................P ? 100.00%

Cost .............................................................................(200) (70%)
Markup) ........................................................................? 30%

To get the selling price,

P
B=
R
Cost
Selling price =
70%
P 200
=
0.7
=P 285.71
Our markup is 30% of selling price, therefore,
Markup = 30% x P 285.71
= P 85.71

Hence,

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 Selling Price .........................................................P 285.71 100.00%
Cost .....................................................................(200) (70%)
Markup) ...........................................................P 85.71 30%

Converting Markup Based on Cost to Markup Based on Selling Price and Vice Versa
If we know the markup based on cost (M Ucost ), we compute for markup based on selling price
(M Usp ) by dividing the markup rate by the selling price rate:

Rate Based on Rate Based on

cost Selling P rice
SellingP rice...................... 150% 100.00%
Cost.............................. (100%) ?
M arkup........................... 50% ?
Hence,

M Ucost 50% 1
M Usp = = =
SP rate 150% 3
To get the MU based on selling price, set the selling price, set the selling price rate as the
denominator of MU based on cost.

Therefore, the cost rate = 100%- 33.33% = 66.67% As such,

Rate Based on Rate Based on

InP eso cost Selling P rice
SellingP rice..................... P 450. 150% 100.00%
Cost.............................. (P 300) (100%) 66.67%
M arkup........................... P 150 50% 33.33%

In the same manner, if we know the M Usp , we can get the M Ucost by dividing the M Usp by
the cost rate:

M Uspt 33.33%
M Ucost = = = 50%
Cost rate 66.67%
To gget the MU based on cost, set the cost rate as the denominator of MU based on selling
price.

Markdown
Traderwould sometimes reduce the selling price to get rid of slow-moving merchnside or out-of-
style inventories to stimulte increased sales or to meet the prices of competitors. We shall refer to
all these reduction in selling prices as markdown.

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 Markdown = Old Selling Price - New Selling Price

= P 450- P400

= P 50

The markdown rate is generally expressed as a percent of the new reduced price; hence, the
new reduced price is the base ( 100%)

Old Selling Price ..............................................................P 450 112.5%

New reduced selling price.......................................................(400) (100.00%)
Markdown ......................................................................... P50 12.5%

M arkdown P 50
Markdown rate ( % of new selling price) = =
N ewSelling P 400
1
= = .125 = 12.5%
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The markdown rate can also be expressed as a percent of the old selling price. In this case, the
old selling price becomes the base, therefore, 100%.

Old Selling Price ..............................................................P 450 100.00%

New reduced selling price...................................................(P400) (88.89%)
Markdown ......................................................................... P50 11.11%

M arkdown P 50
Markdown rate ( % of old selling price) = =
OldSelling P 450
1
= = .1111 = 11.11%
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Practice your skills:

1. An item costs P 1,000.00. Assume an original selling price of P 1,300.00. The selling price
was raised to P 1,400.00. It was later on tagged to sell at P 1,200.00.

a. How much is the mark-on? What percent of cost is it? Of selling price?

b. How much is the additional markup?

c. How much is the markup cancellation?

d. How much is the markdown?

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2. Complete the following table:

Selling M Ucost M Usp

P rice Cost M arkup
1. P 150 P 100 P % %
2. P 200 P 100 P % %
3. P 350 P 200 P % %