America’s Biggest Rip OffsAmerica’s Biggest Rip OffsAre there any items that you buy

or that you can think of that seem really inexpensive to make but priced very high?

What are your thoughts on what products have the biggest markup today?◦ http://money.cnn.com/galleries/2010/news/1001/gallery.americas_biggest_ripoffs/

index.html

Movie theater popcorn - 900% Movie theater popcorn - 900% markupmarkup

A medium bag of popcorn retails for $6. What do you think it costs to make?◦costs just 60 cents to make but◦a whopping 900% markup.

College TextbooksCollege TextbooksThe average estimated cost of

books and supplies in a given college year is $900◦Many students report paying far

more◦Many textbooks are never or seldom

used

Name-brand painkillers - 60% Name-brand painkillers - 60% markupmarkup

A 50-count bottle of 200 mg Advil tablets costs $8.49. ◦The generic bottle sells for $5.29 for

the exact same bottle of generic ibuprofen

◦Law requires all generic drugs to be just as effective (and even use the exact same active ingredients) as the branded drugs they are modeled after

Hotel mini-bars - 1,300% Hotel mini-bars - 1,300% markupmarkupThe chocolate bars and sodas in a

hotel mini-bar can look alluring. But you'll rack up a huge bill if you open up that fridge. ◦ Gummy Bears for $14, anyone?

Hotel in-room movies - 200% markup$10-$15 based on how new and popular the movie

Why Use Markup?Why Use Markup?Why the markup?

◦Cover businesses operating expenses

◦Cover Taxes◦Make a profit

Overhead ExpensesOverhead ExpensesThe markup on the products that

you sell must cover your overhead or operating expenses ◦Overhead expenses include wages

and salaries of employees, rent, utility charges, and taxes, Supplies, advertising, miscellaneous expense Also known as Operating Expenses

Overhead ExpensesOverhead ExpensesFormula: Retail price * Overhead

Percentage◦ Overhead is an estimated percentage of

retail price◦ Same as your overhead expenses for gross

salesIf your total overhead expenses are

40% of gross sales, what % of your retail price on each item would be overhead? ◦ 40% (use the same as for gross sales)

Example: OverheadExample: OverheadYour total overhead expenses are 15%

of total gross sales of $1 million dollars. If you have an item that costs $1000 and sells for $1333:◦ What is your overhead percentage?

15%◦ What is the overhead amount on that one

item? $1333 X .15 =

◦ What is the Markup amount on this item? $1333 – 1000 =

$333

$199.95

Overhead ExpensesOverhead ExpensesNet Profit/Loss = subtracting your overhead

expenses from your revenue (markup)Profit: you made more money than you

spent◦ When your Markup > Overhead expense

Loss: You spent more than you made◦ If Markup < Overhead expense

Example: Do we have Net Profit or Net Loss?◦ Markup = $333 and Overhead = $199.95◦ What is the amount of our Net Profit? Net

Profit

Formula for Net ProfitFormula for Net ProfitThree Step Formula:Markup = Retail Price – Cost Overhead = Overhead % * Retail PriceNet Profit = Markup – Overhead

Your total overhead expenses are 15% of total gross sales of $1 million dollars. If you have an item that costs $1000 and sells for $1333: What is your net profit?Markup = 1333- 1000 = $333Overhead = 1333 X .15 = $199.95Net Profit = $333 - $199.95 = $133.05

ExamplesExamplesRetail price is $140. Cost is $56.

Overhead is 50% of retail price. Find the markup, overhead, and net profit.

Markup = Retail Price – CostMarkup = $140-$56◦ Markup = $84

Overhead = Overhead Percent * Retail Price50% of retail price◦ Overhead = .50 * $140◦ Overhead = $70◦ $70 is spent to cover any expense the

business incursNet Profit/Loss = Markup – Overhead

Net Profit = $84 – $70◦ Net Profit = $14.00

ExampleExampleBob’s Sport Shop purchases 15-

foot rowboats for $44.98 each. Bob sells the boats for $89.99 each. Bob estimates his overhead expenses to be 40% of the retail price of his merchandise. What is the net profit on each 15-foot rowboat?

Answer to ExampleAnswer to ExampleMarkup = Retail Price – CostMarkup = 89.99 – 44.98Markup = $45.01Overhead = Overhead Percent * Retail

Price40% of retail priceOverhead = .40 * 89.99Overhead = 35.996Overhead = $36.00$36 is spent to cover any expense the

business incursNet Profit = Markup – OverheadNet Profit = 45.01 - 36Net Profit = $9.01

Calculate Cost Based on Retail Calculate Cost Based on Retail PricePrice

You may need to decide your product’s cost based on the retail price

◦ Add a new product that your competitors sell and sell it for less, still making a profit

Formula: Retail Price * (1 – Markup Rate) =

Cost

Calculate Cost Based on Retail Calculate Cost Based on Retail PricePrice

Ex: Your competition sells their bag for $95. You want to sell one for $90 to be competitive but still maintain a 40% markupFormula:Retail Price * (1 – Markup Rate) = Cost

What % is considered cost? (1 – .40 = .60) or 60%

Cost Based on Retail PriceCost Based on Retail PriceEx: Your competition sells their bag for

$95. You want to sell one for $90 to be competitive but still maintain a 40% Markup. What is the cost you can pay to meet this goal?

Retail Price * (1 – Markup Rate) = Cost$90 X (1-.40) = $54 is your expected

cost Or

◦ $90 X .60 = $54

Cost based on Retail PriceCost based on Retail PriceYour competitor sells sweatshirts for $65.

You want to sell yours for $60 to be competitive but still maintain a 38%. markup What is the cost you can pay to meet this goal? ◦ Cost % = ◦ Cost = x =

◦ The company Design Shirts sells you shirts for $30. and Retail Shirts sells them to you for $39.

◦ Which could you afford and still make a profit?

Sales TaxSales TaxSales Tax: additional amount

added to the retail price of a product(s) is collected by retailers and paid to state governments

Formula: Sales tax percentage * Retail priceRetail price + Sales Tax = gross sale

What is the sales tax in our city?◦7%

Sales Tax ExampleSales Tax ExampleExample 1:Purchases total $78.50 with Sales Tax 7%

◦What is the sales Tax $? Sales Tax = 78.50 * .07 = 5.50

◦What is the Gross Sale or Total Due? Gross Sale: 78.50 + 5.50 = $84.00

Example 2:Purchases total $86.50 with Sales Tax 7%

Sales Tax = $86.50 * .07 = 6.06 Gross Sale: $86.50 + 6.06 = $92.56

Short Cut ExampleShort Cut ExamplePurchases total $78.50 with a

sales tax rate of 7%Completed in one Step:

◦78.50 * 1.07 = 84.00

Now lets practice on your Now lets practice on your ownownMaking Sense of Markups Worksheet