8

Mathematics
C H A P T E R

of Pricing
“This planet has—or rather had—a problem,
which was this: most of the people living
on it were unhappy for pretty much of the
time. Many solutions were suggested for
this problem, but most of these were largely
concerned with the movements of small
green pieces of paper, which is odd because
on the whole it wasn’t the small green
pieces of paper that were unhappy.”
—Douglas Adams, “So Long and Thanks for all the Fish”

Learning Objectives Chapter Outline

LO 1 Determine retail prices by using markup from cost, 8.1 Markup and Markdown
markdown, and markup based on selling price.
8.2 Profit Margin
LO 2 Calculate the percent markup or markdown
8.3 Series and Trade Discounts
based on cost and selling prices.
8.4 Depreciation
LO 3 Determine and interpret gross and net profit
margins.

LO 4 Calculate invoice costs based on list price and

trade discount.

LO 5 Understand the terminology surrounding cash

discounts and be able to calculate them.

LO 6 Calculate the single discount percent equivalent

to a series of discount percents.

LO 7 Distinguish between percent, straight-line, and

MACRS depreciation and calculate depreciation
rates and amounts, using these methods.

8.1 Markup and Markdown

A very large part of the business conducted in this world is a matter of buying things and then
turning around and selling them to someone else at a profit. When we are setting prices, or when
we are determining how successful those prices will be in meeting a business’s profit goals,
mathematics necessarily must be involved. In this section we will take a look at some of the
most commonly used mathematical measurements and tools used to set and evaluate prices.

332
 8.1 Markup and Markdown 333

In this chapter, we will follow a convention that the price a business pays for an item is
called the wholesale price or cost. The price a business sells the item for will be called the
retail price. We will use these terms even if the business purchases the item from a seller
that might not formally call itself a “wholesaler;” likewise, we will use these terms even if
the individual or business that sells the item is not strictly speaking a “retailer.”

Markup Based on Cost

One common method used for setting the selling price for an item is markup based on cost.
This method is straightforward and agrees with the way most people usually think about
setting prices. To determine a price with this method, we simply take the cost of the item,
and add on a predetermined percent of the item’s cost. For example, suppose that Eddie’s
Bike World can buy a particular model of bicycle for $255.00, and uses a mark up of 50%
based on cost. Fifty percent of $255 is (0.50)($255)
$127.50, and so adding this on
would mean a selling price of $225  $127.50
$352.50.
Finding the selling price in this way doesn’t require too much effort, but we can make
things even a bit simpler. A 50% markup means that every $1.00 of the cost turns into $1.00 
$0.50
$1.50 of selling price. So a $255 cost turns into 225($1.50)
$352.50 in selling
price. Using this logic allows us to find the selling price with a bit less effort, and will also
pay off more richly in some of the problems that follow. We can sum this up in a formula:

FORMULA 8.1.1
Markup Based on Cost
P ⴝ C(1 ⴙ r)
where
P represents the SELLING PRICE,
C represents the COST
and
r represents the PERCENT MARKUP

Example 8.1.1 An auto mechanic charges a 40% markup based on cost for parts.
What would the price be for an air filter that cost him $14.95? What is the dollar
amount of his markup on this item?
Since the markup is 40%, we multiply the cost by 1.40:
P
C(1  r)
P
$14.95(1.40)
P
$20.93
The dollar amount of the markup can be determined in either of two ways. We can multiply
40% by the cost, to get (0.40)($14.95)
$5.98. Or we could subtract the cost from the
selling price to get $20.93  $14.95
$5.98. Whichever way we find more convenient, the
result is the same.
Copyright © 2008, The McGraw-Hill Companies, Inc.

We can also work backward to find cost if we know the selling price and the markup per-
cent. The following example will illustrate this.
Example 8.1.2 Hegel’s Bagels and Vienna Coffeehouse sells souvenir coffee mugs
for $7.95. The markup based on cost is 65%. Find (a) the cost of each mug, and
(b) the dollar amount of the markup.
(a) Working from our formula, we get:
P
C(1  r)
$7.95
C(1.65)
C
$4.82
(b) To find the dollar amount of the markup we can subtract $7.95  $4.82 to get $3.13.
We could also have got this by multiplying (0.65)($4.82)
$3.13.

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 334 Chapter 8 Mathematics of Pricing

A word of caution is in order here, because it would have been very easy to have made a
big mistake in Example 8.1.2. When using percents, we have to be careful what the percent
is of. The 65% markup used in this example was a percent of the cost, not of the selling
price. It is easy to overlook this and find the markup by multiplying by the selling price to
get (0.65)($7.95)
$5.18, which is incorrect. In fact this would overstate the markup by
more than $2! It is vitally important to make sure that you are applying the percent to the
right thing when doing these sorts of calculations. These sorts of mistake not only lead to
lower marks on exams, but when used in the real world they have the potential to lead to
disastrously misguided business decisions.
If we know the cost and selling price, we can determine the percent markup from these,
as the next example will demonstrate.

Example 8.1.3 An electronics retailer offers a computer for sale for $1,000. The
retailer’s cost is $700. What is the markup percent?
Working from the formula, we get:

P
C(1  r)
$1,000
$700(1  r)

Dividing both sides by $700 gives:

1.4285714
1  r

We then subtract 1 from both sides and rewrite the result as a percent:

r
0.4285714
r
42.86%

You may observe that we could also have calculated this by noting that there is a $300
markup, and so as a percent of cost the markup is $300/$700
42.86%. This is also a
correct solution method.

The same danger we saw in Example 8.1.2 is in play here. It is tempting to reason that the
dollar amount of the markup here is $300, and $300 is 30% of $1,000, and so wrongly
conclude that the markup is 30%. The same issue is at play: markup is a percent of cost,
not of selling price. Even though it is easy to see how someone could make this mistake
(especially when the selling price is a nice round number), doing so leads to a result that
misses the mark by quite a lot.
In the exercises you will have plenty of opportunity to work problems similar to these.
You may find that you are able to find the correct answers without relying too heavily on
the formula; if so, there is no need to rely on it too heavily. If you find, though, that you
are making mistakes or getting confused, you may find it helpful to slow down and work
things through carefully, and step by step, using the formula. When in doubt, slow down
and use the formula!

Markdown in action! © PhotoLink/Getty Images/DIL
Markdown
From ordinary life, we are all familiar with the idea of prices being
marked down, for example, as part of a sale or some other promotion.
Mathematically, markdown is quite similar to markup. To calculate
a marked-down price, we simply apply the percent the price is to be
marked down to the original price, and then subtract. For example, sup-
pose Eddie’s Bike World has a “10% off” sale on a bike that normally
sells for $352.50. 10% of $352.50 is (0.10)($352.50)
$35.25, and so
subtracting off this discount gives us a sale price of $352.50  $35.25

$317.25.

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 8.1 Markup and Markdown 335

We can make things even a bit simpler, just as we did with markup based on cost.
A 10% markdown means that every $1.00 of the cost turns into $1.00  $0.10
$0.90
of selling price. So a $352.50 price turns into $352.50(0.90)
$317.25. Just as with
markup, using this logic allows us to find the marked down price with a bit less effort, and
will also pay off more richly in some of the problems that follow. We can sum this up in
a formula:

FORMULA 8.1.2
Markdown
MP ⴝ OP(1 ⴚ d)
where
MP represents the MARKED-DOWN PRICE,
OP represents the ORIGINAL PRICE
and
d represents the PERCENT MARKDOWN

Note that this formula for discount very closely parallels the formula for markup. Note
also, though, that while the markup percent is a percent of the cost, the markdown percent
is a percent of the marked-up retail price.

Example 8.1.4 At its Presidents’ Day Sale, a furniture store is offering 15% off
everything in the store. What would the sale price be for a sofa that normally sells for
$1,279.95? What is the dollar amount of the markdown?
Since the markdown is 15%, we multiply the original price by 0.85:

MP
OP(1  d)
MP
$1,279.95(0.85)
MP
$1,087.96
The dollar amount of the markdown can be determined in either of two ways. We can multi-
ply 15% by the original price to get (0.15)($1,279.95)
$191.99. Or we could subtract the
cost from the selling price to get $1,279.95  $1,087.96
$191.99. Whichever way we
find more convenient, the result is the same.

Again, as we did with markup, we can turn things around and find the original price based
on the marked down price and markdown percent.

Example 8.1.5 Hal’s Hardware Haven is having a going–out-of-business sale.

According to its ad, everything in the store is marked down 40%. If a set of patio lights
is offered at a marked-down price of $29.97, what was the original price? How much
of a dollar savings is this versus the original price?
Working from our formula, we get:

MP
OP(1  d)
Copyright © 2008, The McGraw-Hill Companies, Inc.

$29.97
OP(0.60)
OP
$49.95
To find the dollar amount of the markdown we can subtract $49.95  $29.97 to get $19.98.
We could also have gotten this by multiplying (0.40)($49.95)
$19.98.

The same cautions are in order with markdown as with markup. We have to be very careful
to make sure we are clear just what the percent is of. In the case of markdown, the percent
is a percent of the original price. It is not a percent of the marked down price. It would be
incorrect to apply the 40% markdown rate to the marked-down price to find the amount of
the markdown.
Once again, parallel to what we did with markup, we can find the percent markdown if
we know the original and marked down price.

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 336 Chapter 8 Mathematics of Pricing

Example 8.1.6 At the end of the summer, a backyard play set that usually sells for
$599.95 is marked down to $450. What is the markdown percent?
Working from the formula, we get:

MP
OP(1  d)
$450
$599.95(1  d)
Dividing both sides by $599.95 gives:

0.7500625
1  d
Since the d is subtracted on the right side, while we want a positive d, we add d to both sides
to get:

0.7500625  d
1
Then we subtract 0.7500625 from both sides and rewrite d as a percent to get:

d
0.2499374

24.99%
An alternative approach to the solution is the following. The markdown is $599.95  $450

$149.95. As a percent of the original price this is $149.95/$599.95
0.2499374

24.99%.

Again we need to repeat a caution here. The markdown is 24.99% of the original $599.95
price. It is not 24.99% of the marked-down price of $450.
The amount, or percent, that a price is marked down is also commonly called discount.
The retailer selling the play set in Example 8.1.6 might describe this offer as a 24.99% (or,
more likely, rounded to 25%), or $149.95 discount. This is quite common phrasing, and
probably phrasing that you are already quite familiar with. Be careful, though, not to con-
fuse this with simple discount as discussed in Chapter 2. While the two ideas are similar,
they are not exactly the same thing.

Comparing Markup Based on Cost with Markdown

There are many cases where markup and markdown are both involved, and it is important
to exercise care with the calculations. When both markup and markdown are involved,
sometimes “obvious” things are not nearly as obvious as they seem. The following exam-
ple will illustrate.

Example 8.1.7 Gemma’s Gemstone Gewelry bought a necklace for $375. In the
store, Gemma marked up this price by 20%. Several months later, when the necklace
still had not sold, she decided to mark down the price by 20%. What was the marked-
down price?
The “obvious” answer is $375; she marked it up by 20% and then down by 20%, so it seems
to be common sense that the markup and markdown would cancel each other out. However,
when we work it through, we see that this is not correct.
Markup:

P
C(1  r)
P
$375(1.20)
P
$450.00
Markdown:

MP
OP(1  d)
MP
$450(0.80)
MP
$360.00
The marked-down price was $360, not $375!

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 8.1 Markup and Markdown 337

Why didn’t things work out here as “common sense” would have suggested? The markup
is a percent of the cost, the markdown is a percent of the marked-up selling price. Since
those two 20%’s are not 20% of the same thing, they are not really the same at all. This can
be confusing. It is important to not make assumptions off the cuff when comparing markup
and markdown percents. Be careful and work things through!
Suppose we know a markup percent, and we want to mark things back down to cost. We
can determine what the percent should be, as the next example will show.

Example 8.1.8 If prices are calculated with a 35% markup based on cost, what
is the percent that those prices should be marked down to get back to their original
cost?
We don’t know what sort of things we are pricing here, much less what the dollar amount
of those prices would be. Fortunately, though, since we are working with percents the actual
dollar amounts don’t matter. We can work the problem out with whatever dollar amounts
we like; the percent answer will be the same regardless of the price we assume. Following
what we did to calculate effective interest rates back in Chapter 3, we choose a convenient
cost of $100.

P
C(1  r)
P
$100(1.35)
P
$135.00

MP
OP(1  d)
$100.00
$135.00(1  d)
0.7407407
1  d
d
25.93%

So a 25.93% discount “undoes” a 35% markup.

When “Prices” Aren’t Really Prices

Even though we’ve approached this chapter from the point of view of retail prices, the
mathematics we’ve developed here can be applied to other related situations. Whenever we
have something that increases as a percent of the original amount, we can mathematically
look at this as “markup.” Likewise, whenever something decreases as a percent of some
starting value, we can look at this as “markdown.” The exercises provide several examples
of this; the following example is just one of many possibilities.

Example 8.1.9 In 2004, 184 students graduated from Central City Business College.
The graduating class of 2005 increased by 10.3% over 2004, but then the 2006 class
decreased 9.8% versus 2005. How many students graduated in 2006?
The size of the 2005 class can be thought of as a “markup” over the size of the 2004 class.
Using this idea we get:
Copyright © 2008, The McGraw-Hill Companies, Inc.

P
C(1  r)
P
184(1.103)
P
203

(We round to the nearest whole number, since we are talking about a number of people.)
The 2006 class is given as a percent decrease from the 2005 class, so we can look at this
decrease as a “markdown” from the 2005 class size.

MP
OP(1  d)
MP
203(0.902)
MP
183

So there were 183 students in the 2006 graduating class.

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 338 Chapter 8 Mathematics of Pricing

EXERCISES 8.1

When the final answer is a percent, round to two decimal places if necessary.

A. Markup Based on Cost

1. Complete the following table by filling in the retail prices based on the given costs and markup percents:

Item Cost Markup Percent Retail Price

A $39.03 12.5%
B $1.47 65%
C $69.22 5.9%
D $184.03 22.5%
E $23.36 85%

2. Complete the following table by filling in the retail prices and the amount of markup based on the given costs and
markup percents:

Item Cost Markup Percent Markup Amount Retail Price

A $3.55 50%
B $459.03 24%
C $108.85 2.58%
D $18.32 26.5%
E $62.41 37.5%

3. A hardware store buys a shipment of screwdriver sets of $8.37 each. If the store uses a 37.5% markup, what would the
retail price be?

4. A coin dealer buys gold coins for $735 and then adds on an 8% markup. What is his selling price for each coin? What is
the dealer’s markup on each coin?

5. An electronics retailer charges $49.31 each for a particular model of emergency shortwave radio. Find the cost if the
markup is 25%. Also find the amount of the markup.

6. A college bookstore uses an 18% markup for new textbooks.

a. If a textbook costs the store $107.45, what would the selling price be for the book? What is the amount of the markup?
b. If a textbook is offered for sale for $89.45, what did the bookstore pay for it? How much markup is included in the
bookstore price?

7. Complete the following table by filling in the markup percent based on the given costs and retail prices.

Item Cost Retail Price Markup Percent

A $31.55 $89.99
B $0.82 $1.29
C $15,750 $16,995

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 Exercises 8.1 339

8. Complete the following table by filling in the markup amount and percent based on the given costs and retail prices.

Item Cost Retail Price Markup Amount Markup Percent

A $74.27 $99.99
B $4.22 $12.99
C $834.17 $949.90

9. A travel agency applies a 10% markup to airline tickets that they book. If you paid $399.73 for a plane ticket to Las
Vegas, what was the travel agency’s cost? How much was the agency’s markup?

10. An appliance store offers a new washing machine for $799.95. The store’s cost is $597.03 for this machine. Determine
the amount of markup, and determine the markup percent.

11. An employment agency pays a temp computer programmer $18 per hour, and bills the company where she works
$22.50 an hour. Find the agency’s markup percent.

B. Markdown
12. Complete the following table by filling in the markdown amounts and marked-down prices based on the given original
prices and markdown percents:

Item Cost Markdown Percent Markdown Amount Marked-Down Price

A $249.97 35%
B $19.95 10%
C $75.00 16%

13. Complete the following table by filling in the marked-down prices based on the given original prices and markdown
percents:

Item Cost Markdown Percent Marked-Down Price

A $79.95 12.5%
B $9.50 30%
C $29.29 85%

14. A laptop computer that normally sells for $799.95 is marked down by 12%. Find the sale price.
Copyright © 2008, The McGraw-Hill Companies, Inc.

15. A pet supply store normally charges $49.95 for a 37-pound bag of dog kibble. The store is having a 20% off sale. Find
the sale price for this bag of dog food.

16. The list price of a new Jiangxi Motors Model J car is $29,925. A dealer is advertising an end-of-model-year sale, with
prices marked down 9.5% from list. Find the sale price of this car, and also the amount of the markdown.

17. A restaurant offered a “15% off your total bill” coupon. If you and some friends went out to this restaurant for dinner
and the total bill came to $79.46, how much would this coupon save you? What would your bill be after using the
coupon?

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 340 Chapter 8 Mathematics of Pricing

18. Complete the following table by filling in the markdown amount and percent based on the given original and
marked-down prices.

Item Original Price Marked-Down Price Markdown Amount Markdown Percent

A $74.99 $49.99
B $249.95 $239.99
C $8.00 $5.00

19. Complete the following table by filling in the markdown percent based on the given original and marked-down prices.

Item Original Price Marked-Down Price Markdown Percent

A $37.99 $27.99
B $11,036 $9,999
C $19.99 $3.99

20. A home theater system that normally sells for $299.95 is offered on sale for $189.99. Find the percent markdown.

21. A women’s sweatshirt that normally sells for $19.95 is put on sale for $12.95. What is the markdown percent?

22. A mechanic charges $629.99 for a complete brake job. You have a coupon from the phone book for $50 off any
service over $250. What percent markdown would using this coupon represent?

C. “Prices” That Aren’t Really Prices

23. Zarofire Systems presently employs 1,875 people in its Allegany City headquarters. A story in the local paper quotes
the company’s president as saying that Zarofire intends to increase its headquarters workforce by 18% next year. How
many new jobs are being created?

24. A newspaper advertising executive claims that her paper had 175,000 readers every day last year, and the number will
increase by 8% this year. How many daily readers is she claiming for this year?

25. The Marchand Valley Wind Farm had 315 megawatts of installed electric generation capacity in 2003. By 2007,
installed capacity had grown by 120%. What was the capacity in 2007?

26. An electronics store sold 18,547 videocassettes last year. This year, it expects sales to decline by 17.5%. How many
does it expect to sell this year?

27. The property tax rate in Appaloossa Falls was $56.05 per thousand dollars of assessed value in 2005. In his reelection
campaign, the mayor proudly claimed an 8.5% reduction in the property tax rate in 2006. What was the 2006 rate?

28. Full time enrollment at Devonshire Community College was 4,250 full-time students this year, a 23% increase over
5 years ago. What was the full time enrollment 5 years ago?

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 Exercises 8.1 341

29. Thanks to conservation measures, Cattarauqua Ginseng Enterprises was able to reduce their office electric usage this
year to 935,036 kilowatt-hours. This was a drop of 12.7% from last year’s usage. What was the usage last year? How
many kilowatt-hours did they save?

30. Attendance at the Campbelton Avengers’ minor league hockey games averaged 5,988 this year. This was an increase
of 8.4% over last year. What was the average attendance last year?

D. Comparing Markup with Markdown

31. A drugstore marked up a bottle of shampoo 40% over cost. The store manager wants to put the shampoo on sale at
cost. What percent markdown should he use to bring the price back to cost?

32. If prices are marked up by 22.5%, by what percent should they be marked down to bring the price back down to
cost?

33. A grocery store has been selling potato chips for 15% below the price printed on the bag. The store decides to
discontinue this practice and sell the chips for the printed price. What percent of a price increase does this change
represent?

34. A photocopier enlarges a copy by 25%. By what percent would you need to reduce a new copy to shrink the image
back to its original size?

35. A farmer harvested 18,340 bushels of soybeans this year. This was an 8% drop from last year’s harvest. By what
percent does his harvest need to grow next year in order to reach last year’s levels?

36. The volume control on an amplifier decreases the volume (in decibels) by 20% for each click down. By what percent
does it increase the volume with each click up?

E. Grab Bag
37. a. An appliance store paid $193.05 each for a shipment of sewing machines, and marked the price up by 42%. What
was the marked-up price?
Copyright © 2008, The McGraw-Hill Companies, Inc.

b. Three months later, the store decided to try to sell off the remaining machines by marking the price down by 25%.
What was the sale price of the machines?

38. A music store offers its employees a 30% discount. If the retail price of a CD is $14.99, how much would an employee
pay?

39. A department store uses a 30% markup on men’s casual wear. At the end of the summer season, the department
manager was told to mark everything in the store down to cost, so he marked down all of the prices by 30%.
a. What would the marked-down price be for a pair of shorts that originally cost the store $12.53?

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 342 Chapter 8 Mathematics of Pricing

b. What markdown percent should he have used?

40. Dishonest Dave’s Discount Den is planning on advertising that “everything in the store is being marked down by 15%!”.
In reality, though, Dave plans to first increase his prices so that after the 15% markdown the prices are actually the
same as they were all along. What percent will he first mark up his prices?

41. A retailer uses a 75% markup when setting the price of a piece of costume jewelry. The retail price is $20.86. What is
the cost?

42. A pushcart snack vendor buys 12-ounce sodas for 25 cents each, and sells them for $1. What is the percent markup?

43. An amusement park had 74,006 visitors in the summer of 2005. In 2006, the number of visitors increased by 8.4%. In
2007, though, the number fell by 7.9%. How many visitors were there in 2007?

44. A furniture store marks up its “list” prices by 62.5% over cost, but then marks the list prices down by 20%. What is the
markup percent that it is actually using?

45. An Internet service provider normally charges $59.95 per month for its service. It is offering a promotion where, for the
first year, you can subscribe for $39.95 per month. What percent discount does this represent?

46. Vladimir makes $23,075 per year. He got a 6% raise. What is his new salary?

47. Last year, Howard’s tree service business had gross sales totaling $67,525. This year, sales totaled $82,388. What was
the percent increase in the business’s sales?

48. A cable company offers high-speed Internet service for $49.95 per month, its most popular cable package for $64.99
a month, and unlimited local and long-distance phone service for $39.49 per month. The company offers a discount
package as well; customers who order all three services pay $112.50 per month. What percent of a markdown does
this represent?

F. Additional Exercises
49. Automobiles are usually listed for sale at a price suggested by the manufacturer (the manufacturer’s suggested retail
price (MSRP)), also called the sticker price. The invoice price is the cost of the vehicle listed on the invoice (i.e., the
bill) sent to the manufacturer. While most people think of the invoice price as the dealer’s cost, in reality most car
manufacturers lower the price to the dealer by a holdback, a further discount below the invoice price.
Suppose that a new car has a $29,995 list price, and a $26,792 invoice price. The holdback is 3% of the invoice
price.
a. Calculate the dealer’s actual cost for this car.
b. Suppose that a car dealer offers to sell this car for “1% over invoice.” Calculate the amount of markup over invoice
and the price at which the dealer is offering the car for sale.

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