1.7 Chapter Summary

Key Concepts

• 1.1 Discounts
  • The relationship between distribution and pricing.
  • Some of the discounts available to businesses and consumers.
  • How to calculate the net price when only one discount is involved.
  • How to calculate the net price when multiple discounts are involved.
  • Converting multiple discounts into single discounts.
• 1.2 Invoices, Terms of Payments, and Cash Discounts
  • How invoicing works.
  • Understanding invoice terms and invoice dating.
  • The calculations involved when a full payment amount is made.
  • The calculations involved when a partial payment amount is made.
• 1.3 Markup
  • The three components that compose a selling price.
  • Calculating the markup in dollars and the relationship to pricing components.
  • Calculating the markup as a percentage under two different approaches.
  • Determining the price point where all costs are paid but no profits are earned—the break-even point.
• 1.4 Markdown
  • How to take a regular selling price and make it into a sale price by applying markdowns.
• 1.5 Working with Discounts, Markup, and Markdown
  • Calculating the reduced profit.
  • Combining discounts, markup, and markdown into complete merchandising situations.

Glossary of Terms

• Amount Credited.  The amount deducted from the invoice balance as a result of the payment.
• Amount Paid.  The actual payment amount made that must be converted into its value toward the invoice total.
• Cash Discount.  A percentage of the balance owing on an invoice that can be deducted for payment received either in full or in part during the discount period.
• Cost. An outlay of money required to produce, acquire, or maintain a product, which includes both physical goods and services.
• Credit Period.  The number of interest-free days from the date of commencement before full payment of the invoice is required.
• Date of Commencement. The first day from which the invoice terms extend forward in time and from which all due dates are established.
• Discount. A reduction in the price of a product.
• Discount Period. The number of days from the date of commencement for which a cash discount is offered.
• End-of-Month Invoice Dating. A term of payment where the date of commencement is the last day of the same month as indicated by the invoice date.
• Expenses.  A business’s financial outlays incurred in the selling of a product.
• List Price. A price for a product that has been published or advertised in some way.
• Loyalty Discount. A discount given from a seller to a purchaser for repeat business.
• Manufacturer’s Suggested Retail Price (MSRP). A recommended product retail price that a manufacturer sets for a retailer based on market research.
• Markdown.  A reduction from the regular selling price of a product resulting in a new lower sale price.
• Markup. The process of taking a product’s cost and increasing it by a certain amount to arrive at a selling price.
• Markup Amount. The dollar amount of the expenses and profit combined together into a single number. It represents the difference between the price and cost in dollars.
• Net Price.  The price of the product after a discount is removed from the list price.
• Ordinary Invoice Dating. A term of payment where the date of commencement is the same date as the invoice date.
• Profit. The amount of money that remains after a business pays all of its costs and expenses.
• Quantity Discount. A discount for purchasing larger quantities of a certain product.
• Rate of Markup on Cost. The markup dollars expressed as a rate using cost as the base.
• Receipt-of-Goods Invoice Dating. A term of payment where the date of commencement is the day on which the customer physically receives the goods.
• Rate of Markup on Selling Price.  The markup dollars expressed as a rate using the regular selling price as the base.
• Reduced Profit.  The reduced profit is the amount of profit earned when selling an item at a reduced selling price.
• Reduced Selling Price or Sale Price. A price for a product after a markdown that is lower than its regular selling price.
• Sale Discount. A temporary discount lowering the price from a product’s regular selling price.
• Seasonal Discount. A discount offered to consumers and businesses for purchasing products out of season.
• Single Equivalent Discount. A single discount rate that is equal to a series of multiple rate discounts.
• Trade Discount.  A discount offered to businesses only based on the type of business and its location in the distribution system.

Formulas

• Symbols Used

  • [latex]BE[/latex] = break-even price
  • [latex]C[/latex] = cost
  • [latex]d[/latex] = discount rate or rate of markdown
  • [latex]d_1, d_2, \ldots, d_n[/latex] = multiple discount rates, where the subscript represents each discount up to a count of [latex]n[/latex] discounts.
  • [latex]D[/latex] = discount amount or amount of markdown
  • [latex]d_e[/latex] = single equivalent discount rate
  • [latex]E[/latex] = expenses
  • [latex]L[/latex] = list price
  • [latex]M[/latex] = amount of markup
  • [latex]N[/latex] = net price
  • [latex]P[/latex] = profit
  • [latex]P_{red}[/latex] = reduced profit
  • [latex]ROM_C[/latex] = rate of markup on cost
  • [latex]ROM_S[/latex] = rate of markup on selling price
  • [latex]S[/latex] = regular selling price
  • [latex]S_{red}[/latex] = reduced selling price or sale price

• Formulas Used

  • Single Discount: [latex]\displaystyle{N=L \times (1-d)}[/latex]
  • Discount Amount: [latex]\displaystyle{D=d \times L}[/latex]
  • Discount Amount: [latex]\displaystyle{D=L-N}[/latex]
  • Multiple Discounts:  [latex]\displaystyle{N=L \times (1-d_1) \times (1-d_2) \times \cdots \times (1-d_n)}[/latex]
  • Amount Credited:  [latex]\displaystyle{\mbox{Amount Credited}=\frac{\mbox{Amount Paid}{1-d}}[/latex]
  • Amount Paid:  [latex]\displaystyle{\mbox{Amount Paid}=\mbox{Amount Credited} \times (1-d)}[/latex]
  • Single Equivalent Discount:  [latex]\displaystyle{d_e=1-\left[(1-d_1)\times (1-d_2) \times \cdots \times (1-d_n)\right]}[/latex]
  • Selling Price:  [latex]\displaystyle{S=C+E+P}[/latex]
  • Markup Amount:  [latex]\displaystyle{M=E+P}[/latex]
  • Selling Price using Markup Amount:  [latex]\displaystyle{S=C+M}[/latex]
  • Rate of Markup on Cost:  [latex]\displaystyle{ROM_C=\frac{M}{C} \times 100\%}[/latex]
  • Rate of Markup on Selling Price:  [latex]\displaystyle{ROM_S=\frac{M}{S} \times 100\%}[/latex]
  • Reduced Profit:  [latex]\displaystyle{P_{red}=S_{red}-C-E}[/latex]
  • Reduced Profit:  [latex]\displaystyle{P_{red}=P-D}[/latex]
  • Reduced Selling Price:  [latex]\displaystyle{S_{red}=S \times (1-d)}[/latex]
  • Markdown Amount:  [latex]\displaystyle{D=d\times S}[/latex]
  • Markdown Amount:  [latex]\displaystyle{D=S-S_{red}}[/latex]
  • Rate of Markdown:  [latex]\displaystyle{d =\frac{D}{S} \times 100\%}[/latex]

Attribution

“Chapter 6 & 7 Summary” from Business Math: A Step-by-Step Handbook (2021B) by J. Olivier and Lyryx Learning Inc. through a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License unless otherwise noted.