Transcript Chapter 6

Contemporary Business Mathematics
With Canadian Applications
Eighth Edition
S. A. Hummelbrunner/K. Suzanne Coombs
PowerPoint: D. Johnston
Chapter 5
Trade Discount, Cash Discount,
Markup, and Markdown
Copyright © 2008 Pearson Education Canada
5-1
Objectives
After completing chapter six, the student will
be able to:
• Solve trade discount problems.
• Calculate an equivalent rate of discount for
a discount series.
• Apply three methods of cash discounting.
• Solve problems involving markup based on
selling price or cost and markdown.
Copyright © 2008 Pearson Education Canada
5-2
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.
Copyright © 2008 Pearson Education Canada
5-3
Terminology Used in the
Merchandising Chain
Copyright © 2008 Pearson Education Canada
5-4
Trade Discounts
• Facilitate establishment of price differentials for
different groups of customers.
• Facilitate the communication of changes in prices.
• Reduce the cost of making changes in prices in
published catalogues.
• Stated as a percent of list price or MSRP.(Rate of
discount)
• Subtracted from the list price to give the net price.
Copyright © 2008 Pearson Education Canada
5-5
Trade Discount Formulas
Amount of = Rate of x List
Discount
Discount
Price
Net Price
= List Price – Amount of
Discount
Copyright © 2008 Pearson Education Canada
5-6
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 = $ 28.50
Net Price = $95.00 – 28.50 = $66.50
Copyright © 2008 Pearson Education Canada
5-7
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 = $125.00
0.20
Copyright © 2008 Pearson Education Canada
5-8
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%
$280
Copyright © 2008 Pearson Education Canada
5-9
Computing Net Price Using the
Net Factor
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.
Copyright © 2008 Pearson Education Canada
5-10
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 merchandising
chain.
Copyright © 2008 Pearson Education Canada
5-11
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 = $103.36
Copyright © 2008 Pearson Education Canada
5-12
Another Approach to Discount
Series
List price
$160.00
Less 5% discount
8.00
Net price after first
152.00
discount
Less 15% discount
22.80
Net price after second 129.20
discount
Less 20% discount
25.84
Net price after third $103.36
discount
Copyright © 2008 Pearson Education Canada
5-13
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 = $502.99
Discount = List price – Net price =
$998 – 502.99= $495.01
Rate of Discount = $495.01 = 49.6%
998
Copyright © 2008 Pearson Education Canada
5-14
Single Equivalent Rate of
Discount (Method 2)
A manufacturer sells a big screen TV for $998
less 30%, 10%, 20%.
Net price = (1-.3)(1-.1)(1-.2)$998
= 0.504 ($998) = $502.99
You pay only 50.4% of the list price. The
percent you do not pay is 1 – 0.504 = 49.6%.
Caution: In calculating the single
equivalent discount, do not sum individual
discounts.
Copyright © 2008 Pearson Education Canada
5-15
Formula for Single Equivalent Rate
of Discount
• For every discount series, a single
equivalent rate of discount exists.
• Eq. Disc. = 1- (1-d1)(1-d2)(1-d3)…(1-dn)L
Copyright © 2008 Pearson Education Canada
5-16
Cash Discount
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
Copyright © 2008 Pearson Education Canada
5-17
Interpretation of
Payment Terms
Copyright © 2008 Pearson Education Canada
5-18
Methods for Offering Cash
Discounts
• Ordinary Dating
• End of Month (E.O.M.) - proximo
• Receipt of Goods (R.O.G.)
Copyright © 2008 Pearson Education Canada
5-19
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 = $343.
Copyright © 2008 Pearson Education Canada
5-20
End-of-Month or Proximo
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
Copyright © 2008 Pearson Education Canada
5-21
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.
Copyright © 2008 Pearson Education Canada
5-22
Partial Payment
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 =$102.04
Copyright © 2008 Pearson Education Canada
5-23
Markup
Selling Price = Cost of + Expenses + Profit
Buying
S=C+E+P
Markup = Expenses + Profit
M= E+P
Selling Price = Cost + Markup
S=C+M
Copyright © 2008 Pearson Education Canada
5-24
Rate of Markup
Markup M
RateofMarkupBasedonCost 

Cost
C
Markup
M
RateofMarkup Based on Selling Pr ice 

Selling Pr ice S
Copyright © 2008 Pearson Education Canada
5-25
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%
80
Copyright © 2008 Pearson Education Canada
5-26
Finding the Selling Price
Selling Price = Cost + Markup = C + M
Find the selling price of an item costing $52 if
the markup is 40 % of cost.
S = 52 + .40(52) = 52 + 20.8 = 72.8
Find the selling price of an item costing $52 if
the markup is 40% of the selling price.
S = 52 + .40S
S - .40S = 52
.60S = 52
S = 52/.60 = 86.67
Copyright © 2008 Pearson Education Canada
5-27
Markdown
• 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.
Copyright © 2008 Pearson Education Canada
5-28
Markdowns
Sale Price = Regular Selling Price - Markdown
A bicycle originally priced at $179 was sold
for $129.
Amount of discount = $179 – 129 = $50
Rate of markdown = 50 = 27.93%
179
Copyright © 2008 Pearson Education Canada
5-29
Summary
• Trade discounts facilitate the pricing of
goods along the merchandising chain from
the manufacturer to the consumer.
• Cash discounts are price reductions which
encourage prompt payment of invoices.
• Markups allow the retailer to set a price to
cover cost, expenses, and profit.
Copyright © 2008 Pearson Education Canada
5-30