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I hope this is the correct forum to post this question. I'm going through one of the rea tests, and there's a question about calculating Selling Price of a product that doesn't make sense to me. The question is something like this
Toy company A wants to calculate the selling price on some widgets they bought. The cost of each widget is $400, and they want a markup of 60 percent. What should their selling price be?
I selected $640, but the answer is $1000
The formula to calculate selling price is SP = Cost + Markup the cost is $400, and the markup is 60% so wouldn't it be $400 + $240 = $640? I must be doing something wrong, can someone help?
thanks
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I'm not sure it's the correct forum either, but $640 is the correct answer. Either the book's question is somehow a little different or it's just a mistake in the book.
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It looks like your math is right. Are you taking the tests on the cd or in the book? I have heard some very bad reviews on the cd that comes with the book, alot of people say that it will misslead you. I don't know what that has to say for the testing material out of the book!
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Thanks for the replies. Yes I'm doing the test from the CD. I did my math over and over and even googled the calculation. it all came out to $640. Guess the CD is wrong.
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This is a common problem of wholesale markup versus retail markup. The answer provided is correct if you are marking the product up retail. Let me explain:
Retail (price you sold it for) =$1000
minus the cost price 400
Equals profit $600
If you take the profit (600) and you ask what percent (P) of the retail price (1000) is my profit(600) you get %60.
P x 1000= 600; divide by 1000; P=600/1000; P=0.60 which is 60%.
However, your answer is correct if you look at your answer in terms of wholesale markup:
Retail $640 minus wholesale cost (400) is 640-400=240
Now if you ask what percent (P) of the wholesale (400) is my profit (240) you get P x 400= 240; divide by 400; P=240/400; P=.60 which is 60%.
Retail markup or percentage is useful to businesses because they can figure if they sell 1000 dollars worth of goods they will make X amount of dollars of profit.
In order to figure out how much to mark up an item when you are only given the cost (wholesale price) and a desired retail profit percentage (in this case %60) you must write the problem out in a formula. In the end, I want to know the Percentage (P) i can multiply my cost (400) by and have the Profit (400 x P) equal .6 (60% the markup you want) times both my original cost (400) added to my profit (400 x P).
I will try to write it out so that it is somewhat clear:
on the right side of the equation i have my retail price {400(cost) + (P x 400 profit)} times 60% which will equal my 60% retail markup.
On the left side of the equation I have my unknown (P). I want to know what P is so that when I multiply it by my cost (400) it equals 60% retail markup ( right side of the equation)
P(Percentage I need) x 400 (cost) = .6 {400(cost) + (P x 400 profit)}
P x 400 = .6 {400 + (P x 400)}
400P = .6 {400 + (400P)}
400P = 240+ 240P subtract 240P from both sides
160P = 240 divide both sides by 160
P= 1.5
P = 150%
Check it.
400(cost) times 150% = 600; add 600 (markup) to 400 (cost) = 1000 (retail). What percent (P) of retail (1000) is 600?
P x 1000= 600; P = .6; P= 60% so it works. If you multiply your wholesale by 150% you have marked you item up 60% retail.
I hope you could understand a little of my endless rambling. I am not very good at explaining things clearly.
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Bassmanj, Rambling? Clearly? This is the BEST, complete explanation I've read on this to date! REA and a few texts I've referred to sucked. Great job, thank you!
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I agree with Bassmanj. Sometimes people also add in a percentage of operating costs (rent, electricity, salary) to the wholesale price before calculating markup. But the question doesn't seem to factor that in.
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Very good. I think what Bassmanj is describing is usually called MARGIN, not MARKUP, but I'll bet that's the confusion in the original problem. As stated by the OP, $640 is the right answer. If you change "they want a markup of 60 percent" to "they want a margin of 60 percent," though, the right answer is $1000.
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