Business Math

Chapter 3 (Lesson 1,2,3 and 4)

Chapter 3

• PRICING
• PROFIT OR LOSS
• TRADE DISCOUNTS
• CASH DISCOUNTS
Pricing
PRICING
• Setting prices is another business application of our
knowledge on percentage. In trading or
merchandising firms, those who do "buy and sell,"
meaning what they buy, they sell, and manufacturing
firms, those who buy raw materials, process them
and sell the finished products, and make use of
pricing decisions. Setting the right
PRICING

price is important for goods to sell. If the price is too

high, the customers may not be able to afford it; if is set
too low, the company may not be able to make a profit
considering that it is not only the cost of the product
that is to be taken into consideration. There are also
the operating expenses, both administrative and selling,
to be considered. The selling
PRICING

• should be able to absorb the cost and the operating

expenses and still give a margin for the company to
earn a profit.
 COST

• Cost refers to the purchase price

of an article.
 MARKUP

• Initial Mark up or Mark-on refers to the amount added to

cost to arrive at the original selling price. It is sometimes
referred to as margin. In other words , it is the different
between the original selling price and the cost.
• Additional Mark up refers to amounts added to the original
selling price to arrive at a new selling price . For business
mathematics purposes,we shall refer to both mark on, initial
mark up and additional mark up as "mark up" only.
 MARKDOWN

• Market cancellation refers to the decrease in the new

selling price that does not decrease it below the original
selling price .
MARKDOWN

• Markdown refers to reduction in the original selling

price.
• For business mathematics purposes ,we shall refer to
both markup cancellation and markdown as mark
down only.
Difference between Markup and Margin

• Margin (also known as Gross Margin) is sales minus

the cost of goods sold. Gross margin in easier to
arrive at and Is ,therefore,easier to use as well.
• Markup is the amount by which the cost of a product
is increased in order to derive the selling price .
Difference between Markup and Margin

• Therefore ,the margin is addressing the profit as it

relates to selling price : where as the markup
addresses the profit as it relates to cost price.
MARKUP

• For example ,if a profit sells for P200.00 and costs

P140.00 to manufacture,its gross margin is P60.00,
stated as a percent ,the margin is 30%(calculated as
the margin divided by sales). This is the mark up
based on sales or selling price.
MARGIN

• To use the preceding example, a markup of P60.00

to the P140.00 cost yields the P200 selling price .
Stated as a percent ,the markup percentage 42.86%
(calculated as the markup amount divided by the
product cost). This is the markup based in cost .
MARKUP

• 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%, being the
base. As such ,to express the markup in terms of
percent based on cost.
MARKUP BASED ON COST

• Selling price……………………….P450 150%

Cost…………………………………..P300 100%
Markup……………………………..P150 50%

• To get the corresponding percent for the selling price

and the markup , we use cost as the base:
MARKUP BASED ON COST

• R= P
B
Selling price as % of cost Selling price
Cost
450 =1.5
300
150%
 MARKUP BASED ON COST
Mark up as % of cost Markup
Cost
150 1
300 2
0.5

50%
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…………………………P450 100%
Cost…………………………………….P300 67%
Markup……………………………….P150 33%
MARKUP BASED ON SELLING PRICE(MARGIN)

• To express the cost and the markup in percent ,the

selling price is used as the base:
 MARKUP BASED ON SELLING PRICE(MARGIN)

Cost
Cost as % of selling price Selling Price
300
450
2
3
67%=0.67
MARKUP BASED ON SELLING PRICE(MARGIN)

• Markup as % of selling price Markup

Selling Price
150
450
1
3
33%=0.33
Converting market based on cost to markup, Based selling price and vice
versa

• If we know the markup based on cost (MU ),we cost

compute for markup based on selling price (MU )
by dividing
sp
the markup rate by the selling price rate:
 Converting market based on cost to markup, Based selling
price and vice versa

Rate based on Rate based on

cost selling price
Selling Price…………..........
Cost……………………............ 150% 100%
Markup………………............. (100) 67%
50% 33%
 Converting market based on cost to markup, Based selling price and vice
versa

• Hence,
MU cost 50% 1
MU sp = = = = 33%
SP rate 150% 3
To get the MU based on selling price ,set the
selling price rate as the denominator of MU based
on cost.
Converting market based on cost to markup, Based selling price and vice
versa
To get the MU based on cost ,set the
cost rate as a denominator of MU based
• MU sp on selling price.
MU cost= Cost rate
1
33% 3 1 3 3 1
2
67% 3
3 2 6 2
0.5 50%
PROFIT OR LOSS

Lesson 2
PROFIT

• Profit is what remains of the selling price

(sales)after all cost and expenses had been
deducted.
COST

• Cost means the cost of the product sold or

service rendered.
EXPENSES

• Expenses refer to operating expenses

(administrative and selling expenses)and
financial expenses (interest and other finance
charges).
LOSS

• Loss occurs when the cost and expenses

exceed the selling price or sales.
Income statement for a trading firm

• A trading or merchandising firm buy goods that it

sells . Whatever it buys ,it sells:if it buys shoes,it
sells shoes:and if it buys dresses, it sells dresses.
The account used to report the selling price of the
merchandise it sales.
Gross sales refers to the total sales

• Sales discounts and sales returns and allowance are

deducted from the gross sales to arrive at the net
sales.
• An income statement is the financial statement that
shows the results of operation,that is ,if it earns a
profit or incurs a loss for a given period of time.
COST OF SALES

• The cost of sales is the purchase price and other

expenses incomed in buying the products that the
business has to sell including transportation of the
goods it buys for net sales.

• Operating expenses are expenses incomed to run the

business.
COST OF SALES

• Other income includes interest income and other

incidental income the firms earns like rent incomes if
it has a property that it rents out .
• Other expenses includes interest expenses or finance
charges,financial institutions charge firms for their
services.
GROSS PROFIT

• The gross profit is at times referred to as gross

margin.
• Operating profit /loss is gross profit less operating
expenses.
NET PROFIT

• Net profit/loss is operating profit plus other income

less other expenses.
BREAK-EVEN POINT

Break-even point is the point where a business neither makes a

profit or a loss. At the break-even point, a business revenue is
equal to its total costs. As much as there is no profit or loss at the
break even point the revenue will equal total costs. To determine
the number of units to be sold to break-even point,we can
assume that :

• Sales =Variable costs + Fixed Cost

BREAK-EVEN POINT

• If we let x represent the number of units to break-even,we can

use the following formula adopted from the above formula .
• Px= vx + FC
• where P is the unit price
• x is the number of units
• v is the variable cost per unit
• FC is the total Fixed cost
BREAK-EVEN POINT

To solve for x:
Px-vx = FC
x(P-v) = FC
• x= FC
(P-v)
BREAK-EVEN POINT

Therefore ,the break- even point in numbers of units

would be :
• x = FC
(P-v)
BREAK-EVEN POINT

The break-even point in pesos would be:

• BEP in Pesos = Unit Price x BEP in Units

TRADE DISCOUNTS

Lesson 3
TRADE DISCOUNTS

• A trade discounts is a reduction from list price

granted to buyers . It could take the form of volume
discounts for large purchase ,dealers or distributors
could either be a single discount or a series of
discounts.
SINGLE DISCOUNTS

• Computing for discounts makes use of our basic

percentage formula P= BR where the base is the list
price, the rate is the discount rate , and the
percentage is the discounts.
SINGLE DISCOUNTS

P=B
R
Discount =List Price • Discount rate
• Net invole price =List Price- Discount
SERIES OF DISCOUNTS

• Method 1 : Multiply the list price by the first discount

rate . The next discount rate is then applied on the
difference between the list price and the first
discount to get the second discount . We then deduct
the second discount from the said difference. We
continue with the same process depending on the
number of discounts in the series
SERIES OF DISCOUNTS

• Method 2: Deduct the first discount rate from 100%

and multiply the list price by the rate obtained .
Deduct the second discounts rate from 100% and
multiply the first balance obtained by the second rate
obtained.
SERIES OF DISCOUNTS

• Method 3: Convert the series of discounts to a single equivalent rate.

To do so,we first deduct the series of discounts individually from 100%
and then multiply the resulting products by themselves to give us the
NIP rate . If we multiply the NIP rate by the list, we get the net invoice
price . Deducting the net invoice price from the list price will give us
the single equivalent discount. Alternatively , we deduct from 100% to
get the single equivalent discount . This single equivalent rate then
multiplied with the list price to get the discounts. When we deduct
the discount from the list price we get the net invoice price.
CASH DISCOUNT S

Lesson 3
CASH DISCOUNTS

CASH DISCOUNT - An incentive that a seller offers to a

buyer in return for paying a bill owed before the
scheduled due date.
•
 Cash Discount = Price x Discount Rate = Net Amount =
Price – Cash Discount=amount paid
•