# Study Sheet of Markup and Markdown

Posted by Professor Cram in Markup and Markdown

## Accounting Terms

**Markup**is the amount of money above their cost of a product or service that a business will charge for that product or service.- The
**Price**of a product or service is what a business is charging after it applies a markup. **Markdown**is the reduction in price of a product or service based on a percentage of the original price.- The
**Original Price**of a product or service is what a business was charging before it decided to apply a markdown. - The
**Sale Price**of a product or service is what a business is charging after it applies a markdown.

## Markup from Cost

- Also known as Cost-Plus-Markup
- The Markup Rate is expressed as a percentage
- Given two of Price, Cost, and MarkupRate:
*Price = Cost x (1 + MarkupRate)**Cost = (Price)/(1 + MarkupRate)**MarkupRate = (Price/Cost) – 1*

## Markup from Price

- The markup rate is how much (i.e., what percentage) of the price is markup
- Markup from Price gives a business a set percentage of profit across different products
- The Markup Rate is expressed as a percentage
- Since the Markup Rate is the percentage of the price that is markup, it can never exceed 100%
- Given two of Price, Cost, and MarkupRate:
*Price = Cost/(1 – MarkupRate)**Cost = Price x (1 – MarkupRate)**MarkupRate = 1 – (Cost/Price)*

## Pricing Perishables

- Assumes some portion of the product will spoil and become unsellable
- A second round of markup that adds the cost of the unsellable product evenly to the balance of the sellable product
- For example, if a 40-pound box of bananas yields 5 pounds of spoilage then the price on 35 pounds must be marked up to cover the cost of the spoiled 5 pounds
- The Spoilage Rate is expressed as a percentage
- Given two of NewPrice, OldPrice, and SpoilageRate:
*NewPrice = OldPrice/(1 – SpoilageRate)**OldPrice = NewPrice x (1 – SpoilageRate)**SpoilageRate = 1 – (OldPrice/NewPrice)*

## Markdowns

- Businesses generally use markdowns to generate sales and/or clear inventory
- The Markdown Rate is expressed as a percentage
- Given two of SalePrice, OriginalPrice, and MarkdownRate:
*SalePrice = OriginalPrice x (1 – MarkdownRate)**OriginalPrice = SalePrice/(1 – MarkdownRate)**MarkdownRate = 1 – (SalePrice/OriginalPrice)*

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