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BUYING AND SELLING

The supply chain is the process of getting a product from point A to point B. The
figure below shows an example of a supply chain:
Supplier

Manufacturer

Wholesaler

Retailer

Consumer

Within the supply chain, all of the channels must make a profit on the product to remain
in business.
Each channel applies a markup above its cost to buy the merchandise, which
increases the price of the product. Sometimes a manufacturer or supplier offers a discount
or a series of discounts to sell more product. When the product is sold to the consumer,
the regular selling price may be marked down to a sale price in response to competitors
prices or other economic conditions.
Price, cost, and expenses of a product determine the profit for that product.
Understanding the relationships between these variables is crucial in maintaining a
successful business. In this chapter, we will learn how to calculate a price that is
affordable, yet can sustain a business and make profit.
I.

MARKUP AND MARGIN

Definitions

Cost () refers to how much a trader purchases an item from its supplier.

Selling price () refers to how much a trader sells the item to its customers.

The primary purpose of operating a business is to generate profits and if the selling
price is too high, it may not be affordable; if too low, the company may not be able to
make a profit. It must be able to cover the costs of buying goods, operating expenses of
the business, and profit required by the owner to stay in business.
The selling price must cover
1. the cost ();
2. the expenses () of the business;
3. the profit () required by the owner to stay in business.
=++

(Eq. 1.1)

Eq. 1.1 can then be rearranged,

=+
The difference between selling price and cost is known as markup ( ).
= +

(Eq. 1.2)

Hence, from Eq. 1.1,

= +
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(Eq. 1.3)

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Rate of Markup
A markup may be stated in one (1) of two (2) ways:
1. as a percent of cost; or
2. as a percent of selling price.
In the first method, markup is stated as a rate with cost as base.

100%

This is the rate of markup based on cost.

(Eq. 1.4)

The second method states markup as a rate with the selling price as base.

100%

This is the rate of markup based on sales.

(Eq. 1.5)

Markup and Gross Margin

A markup based on cost is termed just the same (markup) but a markup based on
selling price has a specific terminology. This is known as the gross margin, or margin.
When the cost is known, the markup and margin can be used to set desired selling
prices.
Given markup ( ) and cost (), from Eq. 1.3,
= +
From Eq. 1.4,
= .
Therefore,
= + ( )
Factoring out , we arrive at
= (1 + )

(Eq. 1.6)

On the other hand, given margin ( ) and cost (), from Eq. 1.3,
= +
From Eq. 1.5,
= .
Therefore,
= + ( )
( ) = .
Factoring out ,
(1 ) = .
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Hence,
=

(Eq. 1.7)

On the other hand, when the selling price is known, the markup and margin can be
used to find the cost of an item.
Given selling price and markup , from Eq. 1.6,
(1 + ) =
(1 + )

1
1
=
.
(1 + )
(1 + )

Therefore,
=

1 +

(Eq. 1.8)

Similarly, given selling price and the margin , from Eq. 1.7,

=
1

(1 ) = (1 ).
1
Hence,
= (1 )

(Eq. 1.9)

As seen from Eq. 1.4 and Eq. 1.5, addresses profit as it relates to cost price while
addresses profit as it relates to selling price.

If we multiply markup ( ) by , we get the margin ( ). Conversely, if we

multiply the margin ( ) by , we get the markup ( ). Therefore, we arrive at the

following equations which we can use to convert markup to margin, and vice versa:

II.

(Eq. 1.10)
(Eq. 1.11)

MARK-ON AND ADDITIONAL MARKUP

Most of the time, traders apply additional markup to the selling price of their product
to arrive at a new selling price.
The selling price derived from Eq. 1.2 which is will be referred to as original
selling price and be denoted as (0 ). The initial markup applied ( ) will be referred to
as mark-on.
As a notation, will represent the markup added and the resulting new selling
price will be denoted as .

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This means that if a trader applies an additional markup 1 to 0 , the new selling
price would be
1 = 0 + 1 .
If the trader decides to apply a second additional markup 2 , the new selling price
would be
2 = 1 + 2 .
In general, for an integer 1,
= 1 +
III.

(Eq. 2.1)

MARKDOWN
Sometimes, after a trader applies additional markup, the selling price loses its appeal
to the customers. If a trader reduces the selling price to a new selling price that does not
go below the original selling price 0 , then the trader applies what is called mark-up
cancellation.
In this course, the same notation will be used for additional markups and markup
cancellations; the difference will be in the values. Additional markups will be positive
while markup cancellations will be negative.
If the price goes down below 0 , then the adjustment is referred to as markdown
( ). Further reductions will still be referred as markdown and denoted with the same
notation. If the selling price goes below 0 , it is termed as sale price.
= ; =

(Eq. 3.1)

The purpose of a markdown may be for promoting sales, matching competitors

prices, or clearing out inventories that are discontinued or seasonal.
The markdown rate ( ) or discount rate is the relationship between the amount of
the markdown and the regular selling price, and is stated as a percent of the regular
selling price.
=

100% =
100%
0

(Eq. 3.2)

To solve for the sale price given rate of markdown, we use Eq. 3.1.
=
From Eq. 3.2, using the base-rate-percentage relationship,
=
Therefore,
= ( )
Factoring out ,
= 0 (1 )

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(Eq. 3.3)

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IV.

DISCOUNT
A trade discount is a reduction of a list price () or manufacturers suggested retail
price (MSRP) and is stated as a percent of the list price. When computing a trade
discount, keep in mind that the rate of discount () is the amount of discount () based
on the list price:

(Eq. 4.1)

(Eq. 4.2)

(Eq. 4.3)

An items net invoice price () is what remains when the amount of discount is
subtracted from the list price.
=

(Eq. 4.4)

The net price factor () rate is 100% less the discount rate ().
= 100%

(Eq. 4.5)

In Eq. 4.4, must be first found, then deducted to to arrive at . Instead of doing
this, can be found by using the more efficient approach. From Eq. 4.4,
=
= ( )
= (1 )
= (100% )
Substituting the identity in Eq. 4.5,
=

(Eq. 4.6)

If a list price is subject to two (2) or more discounts, these discounts are called a
series of discounts.
When computing the net price, the discounts making up the series of discounts are
applied to the list price successively. The net price resulting from the first discount
(1 ) becomes the list price for the second discounts (2 ); the net price resulting from
the second discount (2 ) becomes the list price for the third discount (3 ); and so on.
Therefore, given a discount series 1 , 2 , , ,
1 = 1 1 ; 1 = 1 1
1 = 2
2 = 2 2 ; 2 = 2 2

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2 = 3

= 1 ; = 1

(Eq. 4.7)

The net price factor can be used to solve the net price of a series of discounts.
From Eq. 4.6,
1 = 1 1
This becomes 2 .
2 = 2 2
= 2 1
= 2 1 1
This becomes 3 .
Doing the same computation successively until the application of the net price
factor gives
= 1 2 1 1

(Eq. 4.8)

For every discount series, a single equivalent rate () of discount exists.

= 1 ( 2 1 )

(Eq. 4.9)

Where the net price factor for the series of discount is 2 1

V.

PROFIT AND LOSS

The Ian Mathew Curious Show
Show Topic: Business Success Stories
I. M Everyone loves it. My personal favorite has always been the Double Moola Berry
Sundae. Thats right. Were talking about that delicious ice cream from the ever
popular Buckmans Ice Cream Palace. And here today with us is the millionaire
and founder of Buckmans, please welcome to the show, Mr. Jesse Buckman.
Jesse Thank you, Ian. It is so nice to be here. And please, call me Jesse.
I.M. Thank you, Jesse. We all know how successful your ice cream company is today,
but lets go back to the beginning. How did all this get started?
Jesse Well, Ian, it all started in fourth grade. That was the first time I began to think of
ways to earn money. My first profits came from recycling. Each week, I would
pull my wagon around the neighborhood collect as many cans and bottles as I
could. It was a great first business because there were no costs. I got to keep all
the money I got from the recycler as profit.
I. M. Very good! You were able to earn money and help the community at the same
time.
Jesse Yes. And then I tried some other ways to earn money.

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I. M. I understand you hosted garage sales. How did that work?

Jesse As I collected things to recycle, I would also collect things for my garage sales.
Some things my neighbors would pay me a fee to sell for them and some things I
would buy and resell for a profit. Garage sales taught me a lot about how to price
things for a profit.
I. M. What do you mean?
Jesse Well, I learned how to record how much I had paid for an item, and then price it
higher. The difference between how much I had paid and how much I sold it for
was the money I could keep as profit.
I. M. So, Jesse, when did you start the ice cream business?
Jesse Well, Ian, my next business began when I added selling food and drinks at my
garage sales. I soon realized that I was making more money on food and drinks
than I was on the merchandise. And then one day, I added ice cream to the menu.
I. M. Did that go well?
Jesse Did it ever. Thats when I decided to open my ice cream stand.
I. M. And the rest, as they say, is history. Thank you, Jesse Buckman, for sharing your
story.
Jesse Thank you, Ian. Curious, for inviting me
I. M. Is there anything else you would like to add?
Jesse Yes I would, Ian. To all the young members of your audience I would just like to
say, if I can do it, so can you. Do what I did. Learn about business and you will
be learning how to Mind Your Own Business.
I. M. Thats all the time we have. This has been the Ian Mathew Curious Show and I.
M. Curious!
Total revenue or net sales is the product of total sales volume or quantity () of units
sold multiplied by the price per unit ( ).
=

(Eq. 5.1)

As the market is unpredictable, all costs are classified as either fixed () or variable
(). Variable costs are costs that change in response to market condition. Fixed costs
are constant costs. Total variable cost ( ) is the product of total units produced
multiplied by the variable cost per unit ( ).
=

(Eq. 5.2)

Together with fixed costs (constant cost regardless of production volume), total
variable costs comprise total costs ( ).
= +
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(Eq. 5.3)

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As observed from Buckmans journey as an entrepreneur, profit is what remains of

the sales after total costs have been deducted.
=
= ( ) ( + )
= ( )
= ( ) ( )

(Eq. 5.4)

As stated many times, the main goal of a business is to make a profit, or at least to
avoid a loss. Hence, for a business to avoid bankruptcy, must be at least equal to 0, that
is, 0.00. The point when = 0.00 is called the break even point (). It is the
point when a business neither earns makes a profit or a loss. It assumes that everything
produced is sold, that is, = . At break even, profit is zero. So for the
break even point, we can rearrange Eq. 5.4 to be:
= ( ) +

(Eq. 5.5)

To determine the number of units needed to be solved to break even, we solve for .
From Eq. 5.5,
( ) ( ) =
( ) =
Therefore, a model for the break even point is arrived at:
=

(Eq. 5.6)

One can use Eq. 5.4 to determine the number of units needed to be sold given a target
profit.
= ( ) ( )
( ) ( ) = +
( ) = +
=
VI.

(Eq. 5.7)

Interest
The amount of money paid to borrow money or the amount of money that earned on a
deposit is called interest (). The annual interest rate () is the percent of interest that
you pay for money borrowed, or earn for money deposited. In computing for , the
amount of money a borrower, lender, or depositor started out with, which is called the
principal () is multiplied by and the amount of time (), which must be expressed in
years.
=

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(Eq. 6.1)

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When an account earns interest, the interest is added to the money in the account. The
future value () of an account that earns simple annual interest is the sum of the
principal () and the interest ().
= +
Factoring out ,
= (1 + )

(Eq. 6.2)

Depending on how it is calculated, interest can be classified as simple interest or

compound interest. Simple interest is calculated only on the principal amount of a loan.
Compound interest is calculated on the principal amount and also on the accumulated
interest of previous periods, and can thus be regarded as interest on interest.
That is, on the second application of interest, the principal used is the sum of the first
principal and the first interest. On the third application of interest, the principal used is
the sum of the second principal and the second interest, and so on.
1 = (1 + )
2 = 1
2 = 2 (1 + )
= 1 (1 + )
= (1 + )(1 + )
= (1 + )2
3 = 2
3 = 3 (1 + )
= 2 (1 + )
= (1 + )2 (1 + )
= (1 + )3
4 = 3

In general,
= (1 + )

(Eq. 6.3)

where is the accumulation period and is the number of accumulation periods.

In some instances, time is expressed in days, given the date the loan was granted (or
the deposit was made) and the maturity date.
Computing Number of Days Between Two Dates

Same Month, Same Year

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Given start date 1 and end date 2 , the number of days from
the beginning of month to start date is subtracted from the number of days from the
beginning of month to end date.
= 2 1

(Eq. 6.4)

Different Months, Same Year

Given start date 1 1 and end date , the number of days in
between can be obtained by adding the number of days between 1 1 and
end of month 1 , the number of days in 2 , , 1 , and number of days from the
beginning of month to end date.
=

+
+

( 1 ) 1
( 2 , , 1 )
( )

The formula can further be rearranged into

= ( 1 ) + ( 1 + + 1 )

(Eq. 6.5)

Different Years
Given start date 1 1 1 and end date , the number of days in
between can be obtained by adding the number of days between 1 1 1 and
end of 1 , the number of days in 2 , , 1, the number of days in months preceding
, and .
Note that the calendar has three criteria for a leap year (with 366 days):
the year is divisible by 4
if the year can be evenly divided by 100, it is NOT a leap year, unless;
the year is also evenly divisible by 400,then it is a leap year.

When time is expressed in days, interest could either be expressed as exact interest
( ) or ordinary interest ( ) where

(Eq. 6.6)
365

(Eq. 6.7)
=
360
In Eq. 6.6, is computed using the actual number of days in between the start
date and maturity date while Eq. 6.7 assumes approximate time, that is, every month has
30 days and a year has 360 (12 30) days. Hence, for ordinary interest, Eq. 6.5 could
be simplified as
=

= ( 1 ) + 30( 1)

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(Eq. 6.8)

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VII.

Mortgages
A mortgage is a debt instrument, secured by the collateral (property that a borrower
offers a lender to secure a loan, if the borrower stops making the promised loan
payments, the lender can seize the collateral to recover its losses) of specified real estate
property, that the borrower is obliged to pay back with a predetermined set of payments.
Mortgages are used by individuals and businesses to make large real estate purchases,
like houses and machinery or equipment, without paying the entire value of the purchase
up front. Over a period of many years, the borrower repays the loan, plus interest, until
he/she eventually owns the property free and clear.
Mortgages require a down payment () , which is a usually stated in
percent with purchase price () as a base. That is,
= ; =

(Eq. 7.1)

Mortgage loan () is the difference between purchase price and down payment.
=

(Eq. 7.2)

The set of payments, or instalment of payments is referred to as amortization. Given

the principal mortgage loan and annual interest rate , the total number of years the
mortgage loan is to be paid, and the number of payments per year, the payment every
instalment () is given by

(Eq. 7.3)
( )
=

1 (1 + )
An amortization schedule is a table showing each monthly payment, which breaks
down into principal payment (payment that goes to the mortgage loan) and interest
payment (payment that goes to the interest earned by the lender).
Suppose there is a total of payments per year, to be paid for years. Then the total
number of payments to be made must be . An amortization schedule is composed of
number of payment, amount paid, interest payment, principal payment, and balance
columns (see Table 7.1).
The entries in the payment column are constant, that is, .
The is broken down into principal payment () and interest payment ().
Let 0 = . Suppose it is the payment. Then
= 1

(Eq. 7.4)

and
=

(Eq. 7.5)

Meanwhile, The entries in the balance column is obtained by deducting the principal
payment of the period from the principal of the previous period, that is

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= 1

(Eq. 7.6)

By the time payment is done, = 0 , this explains the meaning of

amortization which literally means to kill.
0 =
No. of
Payment

Amt. of
Payment

Interest
Payment

1 =

1 = 1

2 = 1

2 = 2

Principal Payment

= 1

= 1

Balance
1 = 0 1
1 = 1
2 = 1 2
2 = 2

= 1
=

= 0

Table 7.1
VIII.

Commissions
Sales representatives are paid commission () as incentive or motivation for
increasing a firms sale. Most sales agents earn commission only. They are not paid in
salary. Therefore, they exert their best effort to increase their sales because the more they
sell, the more they earn.
Commissions are expressed either in monetary units or in percent, that is, as part of
the sales. Hence, the base-rate-percentage relationship is applied to compute for a sales
representatives commission.
= ; =

(Eq. 8.1)

If a sales representative is employed by a firm, he/she is given basic salary () in

addition to the commission earned on sales. The gross earnings () therefore is the sum
of the basic salary and commission.
= +

(Eq. 8.2)

In certain cases, however, a sales employee given basic salary earns commission
only when a target sales is surpassed. The target sales is defined as quota.
The sales subject to commission is the difference between the sales made and the
quota. Therefore, commission is computed as

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0.00

= {

(Eq. 8.3)
( ) >

and gross earnings becomes

= {
+ >

(Eq. 8.4)

Graduated commission is a method of compensation for the sales people where the
commission increases incrementally or step-by-step as the volume of sales increases. In
such instances, there are different commission rates based on different levels of sales.
Take the following example into consideration:
A salesman is paid a basic salary of 9,400.00 plus commission on sales above
30,000.00 according to the following schedule:
1.00% on first 20,000.00
2.00% on next 20,000.00
3.00% on sales exceeding 40,000.00
If the salesman sells a total of 75,360.00, then the sales subject for commission
is:
= 75,360.00 30,000.00
= 45,360.00
= 20,000.00 + 20,000.00 + 5,360.00
The first 20,000.00 is subject to a commission rate of 1.00% . The second
20,000.00 is subject to a commission rate of 2.00%. The remaining 5,360.00
is subject to commission rate of 3.00%. Therefore,
= (0.01 20,000.00) + (0.02 20,000.00) + (0.03 5,360.00)
= 200.00 + 400.00 + 160.80
= 760.80
and
= +
= 9,400.00 + 760.80
= 10,160.80
If payment of is done in installation of times, then the commission with rate is
computed as
=

03 Handout 1

(Eq. 8.5)

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IX.

Overrides
For product managers and sales or marketing managers who have people under them
doing sales, overrides () are given in addition to their basic salaries. An override is a
percentage of the total sales made by the people they manage. Given a rate of override
, total sales of representatives the manager handles, override is computed by
multiplying by . That is,
=

(Eq. 9.1)

Hence, given a managers basic salary ( ), the gross earnings of the manager
( ) is given by the following equation:
= + +

(Eq. 9.2)

where the managers commission ( ) on his own sales ( ) with

commission rate ( ) is solved using Eq. 8.1.
Notations
Cost
Selling Price
Expenses
Profit
Markup
Rate of Markup Based on Cost
Rate of Markup Based on Selling Price (margin)
Original Selling Price
Initial Markup or Mark-on
Markdown
Markdown Rate
Discount
Amount of Discount
List Price
Net Invoice Price
Net Price Factor
Single Equivalent Rate of Discount
Selling Price per Unit
Variable Cost per Unit
Amount of Production
Total Variable Cost
Total Cost
Fixed Cost
Break Even Point
Interest
Annual Interest Rate, Commission Rate
Principal
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Time
Future Value
Month
Day
Year
Number of Days
Exact Interest
Ordinary Interest
Down Payment
Monthly Payment
Principal Payment
Balance
Commission
Sales
Salary
Quota
Gross Earnings
Override
Override Rate
Manager

References:
Lopez-Mariano, Norma D. (2016). Business Mathematics. Manila, Philippines. Rex Bookstore.
Lopez, Lundag, Dagal (2016). Business Mathematics. Quezon City, Philippines. Vibal Group
Inc.
Altares, P.S., Arao, R.R., Arce, M.T.B., Bugtong, D.E., Calayag, M.E., CoPo, A.R.I., Laddaran,
A.T., , Yao, A.M.S.D. (2012). Business Mathematics. Manila, Philippines. Rex
Bookstore.
Chapter 6: Trade Discounts, Cash Discounts, Markup, and Markdown. Retrieved from:
http://www.pearsoncanada.ca/media/highered-showcase/multi-productshowcase/showcase-websites-4q-2012/hummelbrunner_ch06.pdf
Chapter
3:
Cost-Volume-Profit
Analysis.
Retrieved
http://www.pearsoncanada.ca/media/highered-showcase/multi-productshowcase/horngren-ch03.pdf

from:

Money

from:

Math
for
Teens:
Break-Even
Point
Retrieved
https://www.saveandinvest.org/sites/default/files/Break-Even-Point.pdf

What is 'Amortization': BREAKING DOWN

http://www.investopedia.com/terms/a/amortization.asp

03 Handout 1

'Amortization'.

Retrieved

from:

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