MKT 300 Margin & Markup - Review Drills PDF

Preview

Summary

Prof: Matthew Phillip...

Description

Question 1 A flower shop sells its bouquets for $29.95, providing a 27% margin. They purchase the flowers from a distributor, who takes a 20% margin. The distributor buys the various flowers from different growers, who typically take a 30% margin. What is the cost for the grower to produce enough flowers for one bouquet? $12.24 $17.49 $5.25 $4.37 $6.89 Hide Feedback

First, we need to find the flower shop's costs: Margin % = Unit Margin / SP = (SP – Cost) / SP 0.27 = (29.95 – Cost) / 29.95 (29.95 * 0.27) = (29.95 – Cost) Cost = 29.95 – (29.95 * 0.27) = 29.95 – 8.09 = $21.86 Then, we need to find the distributor's costs: Margin % = Unit Margin / SP = (SP – Cost) / SP 0.20 = (21.86 – Cost) / 21.86 (21.86 * 0.20) = (21.86 – Cost) Cost = 21.86 – (21.86 * 0.20) = 21.86 – 4.37 = $17.49 Finally, we figure out the grower's costs: Margin % = Unit Margin / SP = (SP – Cost) / SP 0.30 = (17.49– Cost) / 17.49 (17.49 * 0.30) = (17.49 – Cost) Cost = 17.49 – (17.49 * 0.30) = 17.49 – 5.25 = $12.24 Question 2 Your company can acquire all of the necessary components and labour to build your product for $50. Your boss has stated that everything will be sold with a 30% mark-up. What price should you set for the product? $38.46 The correct answer is not listed $65

$71.43 $50 Hide Feedback

In this question, you are given the total costs and the mark-up. First, you need to rearrange the basic equation to figure out how to solve for Price. Since there is only one ‘Price’ variable, you need to try to get it isolated on one side of the equation.

Mark-up % = (Price – Cost) / Cost

Step 1: With ‘Cost’ as the denominator on the right-hand side, the easiest thing to do is bring it to the left side, switching the operator from divide to multiply.

Mark-up % X Cost = Price – Cost

Step 2: Now, on the right-hand side you have Price and Cost, so the next step is to move the Cost variable to the left-hand side of the equation, isolating Price on the right. Remember – when we move things to the other side of the equation, we switch the operators – in this case, from subtraction to addition.

(Mark-up% x Cost) + Cost = Price

Step 3: Now, since we have both the cost and the mark-up %, we can substitute in the numbers for the variables, do the math, and solve for price. This is a good time to point out, though, that what we are really saying with mark-ups, is that we take a percentage of the cost, and add it to the cost to come up with the price. If you look at the equation, and rearrange it slightly, we get “Cost + (Mark-up% x Cost)” – so if our cost is $1, and our mark-up is 50%, we get: $1 + (50% x $1), or $1 + (0.5 x $1).

This is an important relationship, and you should consider what it is saying. If we look at the left-hand side of the equation we have: Cost + (Mark-up % x Cost)

This is equivalent (the same as) the following: (1)Cost + (Mark-up % x (1)Cost)

Note that I’ve added a “1” before both ‘Cost’ variables – any number/variable multiplied by 1 does not change, so we can say that the ‘1’ is hidden. Now, if you imagine that the numbers are converted to percentages, what we are saying is the following: (100%) x Cost + (Mark-up x (100% x Cost))

In other words, we want to set our price as “100% of my cost” plus some fraction (the mark-up) of the cost. This is extremely important. What it means is that you can come up with a shortcut for solving this equation. If you know your cost (say, $10) and you know your mark-up (say, 50%), then to come up with your price you can say “I want to cover 100% of my cost (which is the implied ‘1’) and add another 50% (which is 0.5) to come up with my price”. What this means, in words, is that you want to multiply your cost by (100% + 50%), or 1.5, giving you the equation: Price = Cost x (1.5)

In the case of this question, you know your cost ($50) and your mark-up (30%), so what you can do in the future is say the following: “If my mark-up is 30%, I want to add the cost (100%) and multiply it by the cost, so I can take the cost and multiply it by 30% plus 100%, or 130%. This gives me $50 x 1.3 (which is the numerical equivalent to 130%), so I get: Price = $50 x 1.3 = $65 Question 3 e sold at the retailer for $425.00. The Manufacturer sells them for $97.00 to the acturer $55.00 to produce the jeans. The Importer sells the jeans for $199.00 to the hen sells them for $250.00 to the Retailer. Calculate the Margin $ and Margin % distribution channel?

d 76.36% nd 25.63% nd 105.15% nd 41% nd 70%

After careful consideration, you decide to sell your services with a 25% margin. The customer pays you $140. How much are your costs? $105 $186.67 The correct answer is not listed $112 $115 Hide Feedback

In this question, you need to rearrange the formula to solve for cost. So, we start with the basic formula and try to isolate cost (i.e., get all the costs onto one side, with no other variables).

Margin % = (Price – Cost) / Price

First, we move price from the right side of the equation to the left, changing the ‘divide’ operator to ‘multiply’, giving us:

Margin % X Price = Price - Cost

Next, we could move Price to the left side of the equation, changing the operator. It isn’t written,

but before price is a ‘hidden’ plus sign (+) because the number is positive, so we would switch it to a negative (-) and subtract it from (Margin % X Price). The issue would be that we are then solving for “- Cost”, or negative cost. If you do this, you just need to remember that cost isn’t negative, so flip it to positive.

The other option is to move Cost to the left hand side, giving us: (Margin % X Price) + Cost = Price

Then, we treat “Margin % X Price” as a single variable (we can do this because it is being multiplied) and move it to the right side of the equation. Since it is a single variable, and there’s no sign in front of it, we need to remember that it is positive, so when we move it to the right we flip the sign to negative, or subtract, giving us:

Cost = Price – (Margin % X Price)

With this equation, and our known values for Margin % and Price, we can solve: Cost = $140 – (25% x $140) Cost = $140 – (0.25 x $140) Cost = $140 - $35 Cost = $105 Question 5 It costs you $5 to manufacture your product, and you sell it for $7. What is your mark-up? 140% 71% The correct answer is not listed

40% 28.57% Hide Feedback

Mark-up % = (Price – Cost) / Cost Mark-up % = ($7 – $5) / $5 Mark-up % = $2 / $5 Mark-up % = 0.4 = 40%

on margin in $ and as a % Using the following information: Variable costs $40 and $5. Units sold 1,000 %

%

e are correct

You are the manufacturer. It costs you $10 to manufacture your product, you sell it to a distributor with a 20% mark-up. The distributor sells it to a retailer with a 25% mark-up. What is the retailer’s cost? $14.50 $15.50

The correct answer is not listed $15 $16.67 Hide Feedback

Manufacturer Cost: $10 Mark-up: 20% Price = Cost x (1 + Mark-up) Price = $10 x (1 + 0.2) Price = $10 x (1.2) Price to Distributor = $12 = Distributor’s Cost

Distributor’s Cost: $12 Mark-up: 25% Price = Cost x (1 + Mark-up) Price = $12 x (1 + 0.25) Price = $12 x (1.25) Price to Retailer = $15 = Retailer’s Cost Question 8 A Thai Restaurant sells lunch for $12. The food cost of sales used in producing each set lunch is $5. Additional variable costs are $3 per lunch. What is the contribution margin expressed in dollars and percent? They sell 150 lunches. $1 and 10% $1 and 8.3%

$4 and 50% None of these are correct $4 and 33% Hide Feedback

Margin in Dollars=Selling price-Cost of good sold Margin $ = $12 - ($5 + $3) Margin $ = $12 - $8 Margin $ = $4 Margin % = Margin $/Selling Price Margin % = $4 / $12 Margin % = 33% If I asked for total contribution then the answer would be $600 and 33% Question 9 The distributor sells the product for $100, after taking a 20% mark-up. She bought the product from a wholesaler who added a 25% mark-up. The manufacturer sold the product with a 15% mark-up. What is the manufacturer’s cost? The correct answer is not listed $57.97 $66.67 $51 $62.50

Hide Feedback

Since we are working backwards through the chain, we need to rearrange the formula so that we are solving for cost.

Mark-up % = (Price – Cost) / Cost

First move the Cost from the bottom of the fraction on the right hand side to the left-hand side and change the operator (from divide to multiply).

Cost X Mark-up % = Price - Cost

Then bring the other Cost from the right hand side to the left, and change it from subtract to add.

Cost + (Cost x Mark-up %) = Price

Now we need to factor out Cost, which means rearranging the left-hand side so that we split Cost out, and put it in terms of Cost. We can rewrite the left hand side as follows:

(Cost X 1) + (Cost x Mark-up %)

And this doesn’t change the value, because anything multiplied by 1 remains the same. But, we now have two things (1 and Mark-up %) being multiplied by Cost. To ‘factor out cost’, we pull it out of each set of brackets as follows:

Cost X (1 + Mark-up %)

If you’re unsure if this is the same as above, multiply it out. We are now close to having the formula rearranged to solve for cost. The last thing we need to do is move the (1 + Mark-up %) to the other side. We can treat this as one variable because it is being multiplied. This gives us:

Cost X (1 + Mark-up %) = Price Cost = Price / (1 + Mark-up %)

Now, to solve the question we simply have to work backwards through the supply chain. The key here is to carefully track where we are, and to remember that when we solve for Cost, that is the Price for the preceding step in the chain.

Distributor Price: $100 Mark-up: 20% Cost = Price / (1 + Mark-up %) Cost = $100 / (1 + 20%) Cost = $100 / (1 + 0.2) Cost = $100 / 1.2 Cost = $83.33 = Wholesaler’s Price

Wholesaler Price: $83.33 Mark-up: 25% Cost = Price / (1 + Mark-up %) Cost = $83.33 / (1 + 25%) Cost = $83.33 / (1 + 0.25) Cost = $83.33 / 1.25 Cost = $66.67 = Manufacturer’s Price

Manufacturer Price: $66.67 Mark-up: 15% Cost = Price / (1 + Mark-up %) Cost = $66.67 / (1 + 15%) Cost = $66.67 / (1 + 0.15) Cost = $66.67 / 1.15 Manufacturer’s Cost = $57.97 Question 10 You are operating a clothing business using a hybrid channel structure: you sell some clothing via a retailer and some through your online store. Last month, you sold 325 pairs of jeans through the retailer with a 22% margin, and 150 online with a 29% margin. What was your average channel margin? 51% 23.1% 26.8% 24.2% 25.5% Hide Feedback

Answer: We need to do a weighted-average of the sales Total sales: 150 + 325 = 475 Weighting: 150/475 = 31.57% online sales Weighting: 325/475 = 68.42% retailer sales To get the weighted average we calculate: (Percentage of online Sales * Online Margin) + (Percentage of retail sales + Retail Margin) = (0.3157 * 29%) + (0.6842 * 22%) = 9.1553 + 15.0524 = 24.2077% average margin...