Merchandising Chain Chapter 5 Trade Discount, Cash Discount, Markup, and Markdown Terminology Used in the Trade Discounts (5.1) Merchandising Chain

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1 Chapter 5 Trade Discount, Cash Discount, Markup, and Markdown Merchandising Chain As a product is purchased and sold along a chain, each merchandiser adds a markup above the cost of buying to the merchandise. 1 2 Terminology Used in the Merchandising Chain Trade Discounts (5.1) Reduction of catalogue or list price or manufacturer s suggested retail price (MSRP). Stated as a percent of list price or MSRP. Facilitate establishment of price differentials for different groups of customers. Facilitate communication of changes in prices. Reduce cost of making price changes. 3 4

2 Trade Discount Formulas Amount of Trade = Rate of x List Discount Discount Price Net Price = List Price Amount of Trade Discount Using Trade Discount Formulas A product listed at a price of $95.00 is subject to a trade discount of 30%. Amount of discount = 0.30 x $95 = $ Net Price = $ = $ Calculating the List Price List Price = Amount of Discount Rate of Discount The value of a 20% discount is $25. Find the list price. List price = $25 = $ Finding the Rate of Discount Rate of trade = Amount of Discount Discount List Price Find a rate of discount for a TV set listed at $280 less a discount of $50. Rate = $50 = 17.86% $

3 Computing Net Price Using the Net Factor Exercise 5.1 #B3 & B5 p. 186 d discount rate L list price Net price = (1-d)L Find the net price if the list price is $56 less 18%. Net price = (1-.18)x$56 =.82x$56 = $45.92 Note: If you get a discount of 18%, you end up paying 82% of the list price Discount Series List price may be subject to two or more discounts. Additional discounts are offered to encourage large volume orders and early orders for seasonal items. Additional discounts may be offered to different members of the merchandise chain. Discount Series Net Price = (1-d1)(1-d2)(1-d3) (1-dn)L An item listed at $160 is subject to the trade discount series 5%, 15%, and 20%. Net Price = (1-.05)(1-.15)(1-.20)$160 = (.95)(.85)(.80)$160 = $

4 Another Approach to Discount Series List price $ Less 5% discount 8.00 Net price after first discount Less 15% discount Net price after second discount Less 20% discount Net price after third $ discount Single Equivalent Rates of Discount (Method 1) A manufacturer sells a big screen TV for $998 less 30%, 10%, 20%. Net price = (1-.3)(1-.1)(1-.2)$998 = $ Discount = List price Net price = $ = $ Rate of Discount = $ = 49.6% Single Equivalent Rate of Discount (Method 2) A manufacturer sells a big screen TV for $998 less 30%, 10%, 20%. Exercise 5.1 #C13 & C21 p. 287 Net price = (1-.3)(1-.1)(1-.2)$998 = ($998) = $ You pay only 50.4% of the list price. The percent you do not pay is = 49.6%. Caution: In calculating the single equivalent discount, do not sum individual discounts

5 Cash Discount (5.2) Interpretation of Payment Terms Reduction to encourage prompt payment Rate of discount - percent of net amount after trade discounts have been taken Discount period - time period during which cash discount applies Credit period - time period during which invoice must be paid Methods for Offering Cash Discounts Ordinary Dating (Read p ) End of Month (E.O.M.) (Read p ) Receipt of Goods (R.O.G.) (Read p. 192) 19 Ordinary Dating Start counting the days in the discount period from the date on the invoice. An invoice for $350 with a date of June 10 and terms of payment 2/10, n/30 has been received. The bill is paid on June 15. Find the amount paid. Since June 15 falls within the discount period, a discount of $7.00 can be taken ($350 x 0.02) The amount paid is $350 - $7 = $

6 End-of-Month Start counting the number of days in the discount period from the end of the month of the date on the invoice. An invoice for $400 and dated May 10 with terms 3/10 E.O.M. is received. The bill is paid on June 5. Find the amount paid. Start counting from the end of May. June 5 falls within the discount period. The discount is $400 x.03 Receipt of Goods (R.O.G.) Start counting the number of days in the discount period from the date the goods are received instead of the invoice date. An invoice for $500 with terms 2/10, n/30 R.O.G. is dated on June 10. The good are received on June 18. The bill is paid on June 25. Find the amount paid. June 25 falls within 10 days of June 18. The 2% discount applies. The amount of the discount is $500 x.02 = $10. $490 is paid Partial Payment Exercise 5.2 #C7 & 9 p A partial payment of $100 is made on May 9 on an invoice for $10,000 with terms 2/10, n/30. The invoice date is May 1. The payment date falls within the discount period. Thus credit should be given for the $100 partial payment. (1-.02) x Amount given credit for = $100. Amount given credit for = $100/.98 =$

7 Markup (5.3) Selling Price = Cost of + Expenses + Profit Buying Markup = Expenses + Profit Markup Selling Price = Cost of + Expenses + Profit Buying S = C + E + P Selling Price = Cost of Markup S = C + E + P S = C +M Markup = Expenses M = E + P Selling Price = Cost + S = C + M + Profit Markup Rate of Markup Rate of Markup Markup M based on cost Cost C Rate of Markup Markup M based on selling Selling Price S Finding the Rate of Markup The cost of an electronic gadget to the retailer is $50. The gadget can be sold for $80. Markup = $80 50 = $30 Markup based on cost = 30 = 60% 50 Markup based on selling price = 30 = 37.5%

8 Finding the Selling Price Exercise 6.5 #C1 & 11 p Selling Price = Cost + Markup = C + M Find the selling price of an item costing $52 if the markup is 40 % of cost. S = (52) = = 72.8 Find the selling price of an item costing $52 if the markup is 40% of the selling price. S = S S -.40S = 52.60S = 52 S = 52/.60 = Markdown (5.4) Reduction in price of article sold to customer. Stated as a percent of the price to be reduced. Computed as if it were a discount. Markdowns Sale Price = Regular Sales Price - Markdown A bicycle originally priced at $179 was sold for $129. Amount of discount = $ = $50 Rate of markdown = 50 = 27.93%

9 Exercise 5.4 #B1 p. 210 Exercise 5.4 #B7 & 8 p Exercise 5.4 #B10 p. 211 Homework #5 Exercise 5.1: #A6, A8, B4, B6, C14, C22. Exercise 5.2: #C4, C6, C8, C10. Exercise 5.3: #C2, C10. Exercise 5.4: #B2, B