Worksheet: Metric 5 Mark-up & Margin

1) A computer software retailer uses a markup rate of 40%. If the retailer pays $25 each for computer games sold in its stores, how much do the games sell for?

Answer:

The markup is 40% of the $25 cost, so the markup is:

(0.40) * ($25) = $10

Then the selling price, being the cost plus markup, is: $25 + $10 = $35

Therefore the games sell for $35.

2) A golf pro shop pays its wholesaler $40 for a certain club, and then sells that club to golfers for $75. What is the retail markup rate?

Answer:

The gross profit in dollars is calculated as sales price less cost: $75 - $40 = $35

The markup rate is then calculated:

Markup (%) = Gross Profit / Cost *100

= $35 / $40 *100

= 87.5%

3) A shoe store uses a 40% markup on cost. Find the cost of a pair of shoes that sells for $63.

Answer:

The cost of the shoes is calculated as follows:

Selling Price = Cost + Markup ($)

= Cost + (Markup (%) * Cost)

$63 = Cost + (40% * Cost)

$63 = Cost + (0.4 * Cost)

$63 = (1 + 0.4) * Cost

$63 = 1.4 * Cost

Cost = $63 / 1.4

= $45

4) In 2009, Donna Manufacturing sold 100,000 widgets for $5 each, with a cost of goods sold of $2. What is the company’s margin %? Identify a way that Donna Manufacturing can increase its profit margin?

Answer:

First we have to calculate the gross profit:

Gross Profit = Selling Price – Cost of Goods Sold

= $5 - $2

= $3

Now we can calculate the margin:

Margin (%) = Gross Profit / Sales * 100

= $3 / $5 * 100

= 60%

Ways to increase the profit margin:

- Decrease cost of material

- Decrease cost of manufacturing

- Increase sales price per unit

- Decrease COGS

5) If a product costs $100 and is sold with a 25% markup at a retail store, what would be the retailer’s margin on the product? What should be the markup and selling price if the retailer desires a 25% margin? Why might the retailer be seeking to increase their margin?

Answer:

a) To calculate the margin, we first have to determine the sales price: Markup ($) = Markup (%) * Cost

= 25% * $100

= $25

Selling Price = Cost + Markup ($)

= $100 + $25

= $125

Margin (%) = Markup / Price * 100

= $25 / $125 * 100

= 20%

Therefore the retailer’s margin would be 20% when the product is sold at a 25% markup. b) To calculate the markup and selling price at a 25% margin: Selling Price = Cost / (1 – Margin (%))

= $100 / (1 – 25%)

= $100 / (1 – 0.25)

= $133.33

Markup ($) = Selling Price – Cost

= $133.33 - $100

= $33.33

Markup (%) = Markup ($) / Cost * 100

= $33.33 / $100 * 100

= 33.33%

Therefore to obtain 25% margins, the product would have to be sold at $133.33 with a markup of 33.33%. c) Reasons for increase include:

- Increase in fixed costs (rent, tax, commission, wages, etc.) - Increase in demand and/or decrease in supply

- Other competitors/retailers charge more for the product and the higher margin is a result of increasing sales price to match 6) The following is a Distribution Chain for a Pair of designer Jeans:

The manufacturer in China produces the Jeans for $5.00 a...