Copyright © 2008, The McGraw-Hill Companies, Inc.
8.1 Markup and Markdown 343c. At “1% over invoice,” what is the percent markup over the dealer’s actual cost?- When items are sold at auction, the auction house may charge a buyer’s premium, a seller’s premium, or both.
A buyer’s premium is an amount, usually given as a percent of the selling price, that the buyer pays to the auction
house above and beyond the price of the item bought. A seller’s premium is an amount, again usually a percent of the
selling price, of the item’s price that is kept by the auction house.
Suppose that Auberschein Philatelic Auctions conducts a collectible stamp auction, at which a collection of rare U.S.
stamps is sold for $14,750. The auction house charges a 3% buyer’s premium, and a 5% seller’s premium.
a. How much will the buyer pay, including the premium, for this collection?
b. How much will the seller receive, after the premium?
c. How much does the auction house receive on this sale?
d. What percent of the $14,750 selling price does the auction house receive?
e. What is the house’s percent markup over the cost of the stamps?Copyright © 2008, The McGraw-Hill Companies, Inc.
8.2 Profit Margin 3438.2 Profi t Margin
In the previous section we looked at setting prices with a markup based on cost, and also
with markdown from an initial selling price. These are both common business practices,
but there is far more to the story than just buying an item for one price and selling it for
another. If a clothing store buys a dress for $45, marks it up to $75, and sells it at a marked
down price of $65, at fi rst glance it may look like a profi table transaction. At fi rst blush,
the dress seems to have produced a $20 profi t. The gross profi t on an item is the difference
between what the item cost and what it sold for. So in this example, we would say that the
dress produced a $20 gross profi t.
But of course it is not that simple. In the process of buying and selling the dress, the
store had to take on plenty of other overhead expenses: rent, utilities, salaries, fi nance
costs, advertising expenses, and all the many other costs involved in running a business.
When calculating how much prices should be marked up, or how much room the business
has to mark them down without losing money, management can’t afford to overlook these
other costs. Gross profi t does not take overhead costs into account. The $20 gross profi t is
not what the store really made by selling the dress, since it overlooks the very real overhead
expenses. The net profi t, on the other hand, is the profi t made after taking into account all
of the expenses of doing business. Net profi t is a much better representation of the actual
amount earned.
We will begin by looking at gross profi t, since it is the simpler of the two. Finding the
net profi t on an individual item is a much more challenging question, since it is not at all
obvious how much of the overhead can be attributed to any one specifi c item.Gross Profit Margin
The profi t margin is the profi t expressed as a percent of the selling price. This can also be
simply called the margin; the word profi t is sometimes omitted. As we would expect, the gross
(profi t) margin is based on the gross profi t and the net (profi t) margin is based on the net
profi t. The term profi t margin is sometimes also used loosely to mean the profi t itself—not as a
percent—but when we use the term in this book we will always take it to mean a percent.
If we know both the cost and the selling price of an item, we can use this to calculate
the gross profi t margin on that item. Let’s consider the gross profi t margin for the example
from the opening of this section.