FACTORY OVERHEAD

MARK UP
PRICING
$ 0.07

AGENT

$ 0.18

FACTORY
MARGIN

LABOUR

$ 0.12

FREIGHT/
INSURANCE/
DUTIES

$ 0.58

$ 1.03

MATERIALS AND FINISHING

TOTAL COST
TO
CONSUMER

$ 3.69

$ 14

TOTAL COST
TO RETAILER

$ 5.67

Source : ORourke Group Partners LLC, April 2011

60%

Mark up
Cost Price + Mark up = Retail
Mark up is the value
added to the
Price
products
An Example
: cost
Buyer
for
pays to
= Cost Price
wholesaler
for
Buyer sells
to
= Retail Price
consumer
Mark up = Retail Price Cost Price =

Present Mark up Price

Variable cost per unit
10
Fixed costs
500,000
Expected unit sales
50,000
Unit cost = Variable cost + fixed cost/unit
sales
= 10 + 500,000/50,000 =
20
Assuming a 20% mark up on sales
Mark up price = unit cost/(1 desired return
on sales)= 20/(1 0.2) = 25

Future Estimate
Variable cost per unit
10
Fixed costs
500,000
Unit sold
80,000
Unit cost = Variable cost + fixed cost/unit
sales
= 10 + 500,000/80,000 =
16.25
Adding Mark up of 3.75
Mark up price = 20

A Better Future
Past Estimate :

Future Estimate :

Profit = 5 x 50,000 Profit = 3.75 x

80,000
Profit = 250,000
Profit = 300,000

50,000
Extra profit as compared to last year estimate

Features of Mark up Pricing

Positive
s
Problems

Price competition
minimised
Simplified pricing task
Fairer to both buyers &
sellers
Competition do not lead
to optimal prices
Ignores current demand
Works only if expected
level of sales occur in
reality

THANK YOU

What can go wrong

Variable cost per unit
10
Fixed costs
500,000
Unit sold
25,000
Unit cost = Variable cost + fixed cost/unit
sales
= 10 + 500,000/25,000 =
30
Previous Mark up price = 25
Eventually ended up as Mark down price

Estimated Loss
Estimated :

Real :

Profit = 5 x 50,000 Profit = -5 x

25,000
Profit = 250,000
Profit = -125,000

375,000
Negative Change in expected profit