Copyright © 2008, The McGraw-Hill Companies, Inc.
8.3 Series and Trade Discounts8.1 Markup and Markdown 351351- Suppose that a pharmacy uses a 27% markup based on cost for all prescription medications. A 30-day supply of a
cholesterol drug costs it $82.03 wholesale. Calculate the pharmacy’s gross profi t from a 30-day supply of this drug. - Company A has a gross profi t margin of 24.81%. Company B has a gross profi t margin of 31.92%. Both companies
had $1,000,000 in sales last year. Which company was more profi table? - A travel agent keeps 7½% of the retail price of cruises that she sells as a commission. If she sells a cruise for $2,995,
calculate her gross profi t.
E. Additional Exercises- Determine expenses as a percent of sales if the gross profi t margin is 22.1% and the net profi t margin is 4.7%.
The terms used in Exercises 42 to 43 are explained in Exercise 49 of Section 8.1.- A car dealer offers to sell cars for 1% over invoice. The holdback is 3%. What is the dealer’s gross profi t margin?
- A car dealer believes that expenses total 3.4% of sales. Holdback is 2.85%. Determine the minimum percent markup
over invoice needed to break even.
(^1) There are exceptions to this, though. In some states, it is not legal to sell wine or liquor at a discount, for
example. Also, some manufacturers do not allow their products to be sold at a discount.
8.3 Series and Trade Discounts
Trade Discounts
Merchants are normally free to set prices as they see fit, basing their pricing decisions on
costs, profit targets, and competition.^1 Still, many manufacturers do set suggested prices for
their products. The suggested price for an item often called its list price, or manufacturer’s
suggested retail price (MSRP). When a product has a list price, it is not uncommon for the
item to be sold to a merchant on the basis of a discount to the list price. This is known as
a trade discount.
The mathematics involved here is quite similar to work we have already done. In fact,
though the context may be different, mathematically a trade discount is essentially the
same thing as a markdown.
Example 8.3.1 Ampersand Computers bought 12 computers from the manufacturer.
The list price for the computers is $895.00, and the manufacturer offered a 25% trade
discount. How much did Ampersand pay for the computers?
As with markdown, we can either take 25% of the price and subtract, or instead just multiply
the price by 75% (found by subtracting 25% from 100%). The latter approach is a bit simpler:
(75%)($895.00) $671.25 per computer. The total price for all 12 computers would be
(12)($671.25) $8,055.