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The Business of Community Pharmacy

Presenters: Judy Riffee Art Wharton

Important Terms
AWP- average wholesale price
Markup (gross profit)-The difference between the retail selling price and the wholesale cost. This value is an actual dollar amount. Markup Percentage (percent markup)-This is the percentage that a pharmacy uses to determine the markup amount Overhead- This is the amount of all costs incurred in operating the pharmacy. A portion of the markup for each drug is used to pay for overhead expenses. Professional fees- This is a flat fee that a pharmacy will usually ad to the retail price of every prescription. Most pharmacies will also use this amount as the minimum prescription charge. The professional fee must be added AFTER the markup.

Important Terms
Profit (net profit)-This is the portion of the markup amount that is left after the overhead has been subtracted. Simply put, it is profit AFTER expenses. Retail (selling price)- This is the price the consumer pays for a product. A pharmacy will add a markup amount to the wholesale price to calculate the retail price. Wholesale (acquisition cost or cost)- This is the price that a wholesaler charges a retailer. The pharmacy pays wholesale prices for its products.

Business Formulas
All of the following formulas include algebraic variations. Its simple. Dont let the algebraic term fool you. Use this as a guide based on the correct formula or formula variation to solve problems. Retail (selling price) = wholesale + markup Wholesale = retail - markup Markup = retail - wholesale Markup = overhead + profit Overhead = markup + profit Profit = markup - overhead

Business Formulas
Markup Percentage = markup x 100 wholesale Or, markup wholesale x 100 Markup = markup percentage x wholesale 100 Wholesale = markup markup percentage
The completion of some problems may require several formulas, used in succession. For instance, you may have to calculate the markup separately before adding it to the wholesale price to obtain the retail price.

x 100

What is Business Math?

An area of medical math that is important to pharmacy technicians and their employers. A pharmacy must make money in order to retain their employees. If a pharmacy were to sell products to consumers without first marking them up, they could no longer afford to pay employee salaries. Besides, the cost of employees, there are numerous other expenses that must be paid:

What is Business Math?

Expenses to a pharmacy: Electricity Water Housekeeping Rent Liability Insurance Computer maintenance and software updates Reference Books Drug Inventory Office Supplies Telephone

What is Business Math?

All of these expenses incurred by a pharmacy, including pharmacist and technician salaries, are called overhead or indirect expenses. Every item sold by a pharmacy must share the burden of overhead. If a pharmacy were to determine the retail price by adding overhead to the wholesale price, there would be no profit. As you know, a business has to be profitable to survive. Therefore, in addition to wholesale price and overhead, a pharmacy must determine how much profit they wish to make. Profit and overhead added together is called markup. Overhead + profit = markup Once you have calculated the markup, add it to the wholesale price t get the retail price. Markup + wholesale = retail

What is Business Math?

You may also combine both formulas to get: Overhead + profit + wholesale = retail

Prescription Markup
Prescription markup is the same as gross profit or gross margin. The actual markup amount is the difference between the purchase price of the drug and the selling price (retail) of the same drug.


Prescription Markup
Calculate the markup with the following formula. Markup = Selling price AWP A prescription sells for $36.50, and the AWP is $29.90. What is the markup? Markup = $35.60 - $29.90 Markup = $5.70


Markup Percentage
It is very important to be able to calculate the markup percentage. You should also be able to calculate the markup amount if given a markup percentage. If a pharmacy needs to add a 15% markup to every product to cover overhead expenses and make a profit, the technician should be able to calculate the retail price using the 15% markup and the wholesale price.


Example Markup Percentage

MNO Pharmacy must mark up all items from XYZ Wholesaler 15%. A bottle of 100 count metoprolol costs the pharmacy $9.85. Calculate the retail price of the 100 count bottle. Known Values: Markup Percentage = 15% Wholesale = $9.85 a) Calculate the markup using the following formula. Markup = Markup Percentage x wholesale 100


Average Wholesale Price (AWP)

The cost of a prescription may be computed from a variety of things such as professional fees, AWP and overhead. In the past, patients were responsible for the payment of their medications, but in todays health care settings, many patients have health insurance that reimburses the pharmacy based on the AWP. Some instances occur when the reimbursement may be less than the AWP when one stops to consider contracts or rebates from manufacturers. In most cases, the AWP is the basis for prescription reimbursement to ensure that the pharmacy realizes the necessary profit.


Example Average Wholesale Price (AWP)

Use the following AWP Formula Reimbursement of prescription = AWP + Percentage allowed + dispensing fee AWP for a drug is $64 for a 30-day supply Insurance percentage is + 15% of the AWP Professional (dispensing fee) is $3.00 for this prescription. Reimbursement = $64 + $9.60 + $3.00 ($9.60 is 15% of $64 AWP) Reimbursement = $76.60


The markup on pantyhose at ABC Pharmacy is $1.37. The overhead is $0.75. The pharmacy pays XYZ Wholesaler $0.97 for each pair. Calculate the pharmacys profit and the retail selling price on each pair. Known values: Markup = $1.37 Overhead = $0.75 Wholesale = $0.97


Example Profit
a)Calculate the profit using the following formula Profit = Markup Overhead Profit = $1.37 - $0.75 Profit = $0.62 b) Calculate the retail price using the following formula Retail = Wholesale + markup Retail = $0.97 + $1.37 Retail = $2.34


Example Markup Percentage

Markup = 15 x $9.85 100 Markup = $1.48 b) Calculate the retail using the following. Retail = Wholesale + markup Retail = $9.85 + $1.48 Retail = $11.33


Individual Prescription Cost

You can determine the cost of individual prescriptions. A 100 count bottle of naproxen sodium costs the pharmacy $35.72. calculate the wholesale cost of only 30 tablets. a) Calculate the wholesale price using the following formula. 100 tablets = 30 tablets $35.72 Cross Multiply 100 tablets = 30 tablets $35.72 x tablets x tablets


Example Individual Prescription Cost

100x = 1071.6 Now solve for x: 100x = 1071.6 100 X = $10.720


Prescription Discounts
Prescription Discounts (markdown)may be calculated by subtracting a percentage of the markup price of an item, thus lowering the price the patient pays. Used as an incentive to purchase the desired item by saving on the total price. Amount is always based on the retail selling price and not on the AWP. Discount = Selling price x discount percentage and Discount price = Selling price Discount amount


Example Prescription Discounts

A medication that sells for $45.50 has a manufacturers coupon for 15% off as an incentive to try the medication. What is the cost to the patient following the use of the discount coupon? Use the following formula. Discount = Selling price x discount percentage Discount price = Selling price Discount amount Discount = $45.50 x 0.15 = $6.83 Discount price = $45.50 - $6.83 = $38.67


Calculating Overhead
Over head, as previously discussed, is the cost of doing business. The profit for the pharmacy is based on gross sales amounts received minus the overhead. To figure overhead, the expenses related to the business must be identified and added.


Example Overhead
A pharmacy spends the following amounts per month on overhead. Calculate the overhead for each week. Medication inventory $12,585 Salaries Rent Utilities Insurance Depreciation Taxes Total Overhead 12,500 150 ($6004 weeks/month) 125 ($5004 weeks/month) 400 ($16004 weeks/month) 625 ($25004 weeks/month) 625 ($25004 weeks/month) $27,010/week


Example Overhead
The overhead profit is $27,010 per month If the pharmacist desires a 15% profit, what amount of gross sales would be necessary? Necessary profit = $27,010 x 0.15 = $4051.50 per month Necessary Gross sales = Overhead + Profit = $27,010 + $4051.50 Necessary gross sales for this store to make a 15% profit = $31,061.50 per month


The Daily Cash report

Daily duty of a technician may be to prepare the DCR, or to check payments received during the day. To calculate this, the total cash or checks, discounts, coupons, refunds, voided prescriptions and other payments will be documented and totaled. The total payments and the opening balance should equal the amount of money in the cash drawer at the end of the day.


Example Daily Cash report

The opening balance of the cash drawer is $125 in change. Prescriptions for that day are a total of $2,545, Discounts are in the sum of $52, Coupons of $1.50, refunds of $12,10, over-ring of $2.53.and credit cards of $565.35. The cash on hand at the end of the day is $2,036.48. What should be the closing balance?


Example Daily Cash report

What should be the closing balance? Opening balance $125.00 Purchases Coupons Refunds Discounts Overring Credit Cards Cash at end of day Difference $2036.52 +0.04 +2545.00 1.50 12.10 52.00 2.53 565.35