Study Sheet of Markup and Markdown

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Accounting Terms

  • Markup is the amount of money above their cost of a product or service that a business will charge for that product or service.
  • The Price of a product or service is what a business is charging after it applies a markup.
  • Markdown is the reduction in price of a product or service based on a percentage of the original price.
  • The Original Price of a product or service is what a business was charging before it decided to apply a markdown.
  • The Sale Price of a product or service is what a business is charging after it applies a markdown.

Markup from Cost

  • Also known as Cost-Plus-Markup
  • The Markup Rate is expressed as a percentage
  • Given two of Price, Cost, and MarkupRate:

    Price = Cost x (1 + MarkupRate)

    Cost = (Price)/(1 + MarkupRate)

    MarkupRate = (Price/Cost) – 1

Markup from Price

  • The markup rate is how much (i.e., what percentage) of the price is markup
  • Markup from Price gives a business a set percentage of profit across different products
  • The Markup Rate is expressed as a percentage
  • Since the Markup Rate is the percentage of the price that is markup, it can never exceed 100%
  • Given two of Price, Cost, and MarkupRate:

    Price = Cost/(1 – MarkupRate)

    Cost = Price x (1 – MarkupRate)

    MarkupRate = 1 – (Cost/Price)

Pricing Perishables

  • Assumes some portion of the product will spoil and become unsellable
  • A second round of markup that adds the cost of the unsellable product evenly to the balance of the sellable product
  • For example, if a 40-pound box of bananas yields 5 pounds of spoilage then the price on 35 pounds must be marked up to cover the cost of the spoiled 5 pounds
  • The Spoilage Rate is expressed as a percentage
  • Given two of NewPrice, OldPrice, and SpoilageRate:

    NewPrice = OldPrice/(1 – SpoilageRate)

    OldPrice = NewPrice x (1 – SpoilageRate)

    SpoilageRate = 1 – (OldPrice/NewPrice)

Markdowns

  • Businesses generally use markdowns to generate sales and/or clear inventory
  • The Markdown Rate is expressed as a percentage
  • Given two of SalePrice, OriginalPrice, and MarkdownRate:

    SalePrice = OriginalPrice x (1 – MarkdownRate)

    OriginalPrice = SalePrice/(1 – MarkdownRate)

    MarkdownRate = 1 – (SalePrice/OriginalPrice)