Why Businesses Use Why Businesses Use Markup?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

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?◦7.5%

Sales Tax ExampleSales Tax ExampleExample 1:Purchases total $78.50 with Sales Tax 7.5%

◦What is the sales Tax $? Sales Tax = 78.50 * .075 = 5.89

◦What is the Gross Sale or Total Due? Gross Sale: 78.50 + 5.89 = $84.39

Example 2:Purchases total $86.50 with Sales Tax 7.5%

Sales Tax = $86.50 * .075 = 6.49 Gross Sale: $86.50 + 6.49 = $92.99

Short Cut ExampleShort Cut ExamplePurchases total $78.50 with a

sales tax rate of 7.5%Completed in one Step:

◦86.50 * 1.075 = 92.99

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