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Calculating Selling Price

Calculating Selling Price. PROFIT - Revenue remaining after the expenses of running the business have been deducted. Factors that affect profit:

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Calculating Selling Price

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  1. Calculating Selling Price

  2. PROFIT - Revenue remaining after the expenses of running the business have been deducted. Factors that affect profit: • Demand - If demand for a product or service declines, the price of the good must be lowered in order to move it off of the store’s shelves. By lowering the price, a business owner suffers a loss of profit. • Business expenses -All business expenses affect profit. It is vital that business owners examine expenses and make every effort to minimize expenses associated with operating the business. • Prices - Accurately determining the price of merchandise will ensure maximum sales and maximum profit. • The economy - The economic conditions that exist in a given area can affect profit by having an impact on consumer buying power, thus demand. • Chance -Sometimes a business owner simply chooses to stock the wrong merchandise.

  3. Ways to Increase Profit • Increase worker efficiency - Business owners should carefully consider what tasks need to be done each day and schedule employees accordingly. Over-staffing results in employees without anything to do. Time is money to a business owner. • Increase sales -By increasing sales, whether prices have to lowered in order to do so or not, profit can be increased. • Reduce business expenses-Business owners strive to negotiate the best terms for delivery, leases, rental rates, etc. and after careful examination must make decisions when expenses become a liability to cash flow.

  4. Is the amount paid by a business for products purchased for resale or for use in the production of other goods. Are the first expenses that must be paid. Is deducted directly from sales revenue to determine gross profit. Formula (used on the income statement): Sales Revenue - Cost of merchandise sold Gross profit - Business Expenses Net profit Cost of Merchandise Sold

  5. Basic Pricing Calculations Retail Price - The most basic pricing formula is the one for calculating retail price when given cost and dollar markup. Formulas Retail Price (RP) = Cost (C) + Markup (MU) Cost (C) = Retail Price (RP) – Markup (MU) Markup (MU) = Retail Price (RP) – Cost (C)

  6. Keystone Pricing • A common pricing method used by retailers. • Retail price is calculated by doubling the cost of the merchandise. Formula • cost = $25.00 • retail price = $50.00

  7. Markdowns • The most common type of price change • Used as a tool to stimulate sales, dispose of slow moving products, meet competitor’s prices, and/or increase customer traffic • Markdowns are expressed as a % of net sales. MARKDOWN PERCENTAGE (MD%) = DOLLAR MARKDOWN ($MD) / Net Sales (NS) • MD% cannot be calculated until goods are sold because they are based on net sales. • MD % is usually calculated for a specific period of time rather than on individual items.

  8. Reasons for Markdowns • Buying errors - At times retailers make mistakes when estimating demand for certain products and product features. For example, selecting the wrong styles, color, sizes, materials, and/or quantities. • Pricing errors - Because pricing is an inexact science, the initial selling price may have been set too high, leading customers to a lower priced competitor or making them reluctant to purchase the product at all. • Special sales - At times, regular stock items may be marked down for a special sales event or specific items may be purchased for the purpose of selling them at promotional prices. • Broken assortments - Some products (floor covering, china/crystal, material, etc) are reduced to encourage sales when part of the product has been previously sold. Due to dye lots, discontinued patterns, incomplete sets, seasonality, etc. these products may have to be reduced in order to move them off of the sales floor.

  9. Discounts Given to Resellers by Manufacturers/Wholesalers • Quantity Discounts • Trade Discounts • Cash Discounts

  10. Quantity Discounts • Reductions in price given by manufacturers/wholesalers when a large or specified quantity is purchased. • Cumulative quantity discounts: Based on total purchases over a specified period of time. For example, an office supply wholesaler may offer a 10% discount if purchases total at least$5,000 during a six-month period, or 15% if purchases total at least $10,000 for the same period. • Non-cumulative quantity discounts: Given to buyers for a quantity purchase on a single order. For example, the office supply wholesaler may offer a 5% discount if a business purchases 1-15 boxes of envelopes or a 10% discount if 16-30 boxes are purchased.

  11. Trade Discounts • Also called functional discounts • Offered to channel members for performing certain functions like storing or record keeping • Can be stated as a percentage off the list price or as a series of percentages off the list price. Example: “List price less 45%” or “List price less 30%, less 15%, less 5% ($2000 less 30/12/5).”When stated as a series of discounts, the discounts are not added together; rather they are calculated separately with each succeeding discount based on the previous price.

  12. Cash Discounts offered to buyers as an incentive for paying the invoice amount within a specified number of days. • Ordinary Dating • Advanced Dating • End-of-month Dating • Receipt-of-goods Dating • Extra Dating

  13. Ordinary dating based on the date of the invoice 2/10, net/30 buyer receives a 2% discount if the invoice is paid within 10 days, or the full (net) amount is due in 30 days Advanced dating indicates that the payout period does not begin until the date indicated in the terms 5/10, net/30, June 15 buyer receives a 5% discount if the invoice is paid within 10 days of June 15, or the full amount is due 30 days from June 15 Cash Discounts

  14. End-of-month dating The payout period does not begin until the last day of the month in which the invoice is dated. 2/10, net/30, EOM 2% discount if the invoice is paid within 10 days of the last day of the month of the invoice, or the full (net) amount is due 30 days from the last day of the month. Receipt-of-Goods dating The payout period does not begin until the buyer receives the goods from the seller. 2/10, net/30, ROG 2% discount if the invoice is paid within 10 days of receiving the goods, or the full (net) amount is due 30 days from when the goods are received Cash Discounts

  15. Cash Discounts • Extra dating • The buyer has additional days in which to pay and still receive the cash discount. • 3/10, 60X, net 90 • a 3% discount if the invoice is paid within 10 days plus 60 days from the invoice date, or the full (net) amount is due in 90 days

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