Chapter 14 – Retail Pricing
14–18
ANSWERS TO “GET OUT AND DO ITS”
Results here will vary depending on the merchandise selected. Answers could be
discussed in class to see the findings.
inclusive price. Describe how bundling services and products provide vacationers with value?
Find another example in the travel and tourism industry of price bundling that successfully
increases sales.
The Sandals website highlights what is included in the all-inclusive packaging. Bundling
Chapter 14 – Retail Pricing
4. Go to your favorite food store and your local Walmart to find their prices for the market
basket of goods listed in the accompanying table. What was the total cost of the market basket at
each store? Did Walmart live up to its slogan of “Always lower prices”?
One of Walmart’s current advertising strategies is to encourage customers to compare the prices
ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS
1. What types of retailers often have high/low pricing? What types of retailers generally
use an everyday low pricing strategy? How would customers likely react if a retailer
switched its pricing strategy? Explain your response.
High/Low Pricing – Retailers using a high/low pricing strategy frequently—often weekly—
discount the initial prices for merchandise through sales promotions. Examples: Department
2. Why would sewing pattern manufacturers such as Simplicity, Butterick and McCall’s
print a price of $12.95 (or more) on each pattern and then two times a year offer
patterns for sale at $1.99 each? How could this markdown influence demand, sales and
profits?
Sewing patters are marked down twice a year to move inventory and make space for new
Chapter 14 – Retail Pricing
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3. Reread Retailing View 14/1. Will an EDLP strategy work for JCPenney? Explain your
answer?
JCPenney traditionally used a high/low pricing strategy. Historically, JCPenney would offer
over 600 sales a year with thousands of coupons. JCPenney was losing market share though, and
wondered if following the Walmart model of EDLP would benefit the company. However, the
4. Re-read Retailing View 14.5. What are your thoughts about extreme couponing?
Should retailers take steps to restrict it?
Extreme couponing occurs when customers use multiple coupons or buy in large quantities to
receive discounts. Extreme couponing is challenging because 1) it delays check-out time causing
5. What is the difference between bundled pricing and multi-unit pricing?
Price bundling is the practice of offering two or more different products or services for sale at
one price.
Chapter 14 – Retail Pricing
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6. A department store’s maintained markup is 38 percent, reductions are $560, and net
sales are $28,000. What’s the initial markup percentage?
MMU$ = 10,640.00
7. Maintained markup is 39 percent, net sales are $52,000, and reductions are $2,500.
What are gross margin in dollars and the initial markup as a percentage? Explain why
initial markup is greater than maintained markup.
Gross margin (GM) = Maintained markup – Reductions
GM = (52,000 x .39) – 2,500
8. The cost of a product is $150, markup is 50 percent, and markdown is 30 percent.
What’s the final selling price?
Retail Price = Cost + Markup
9. Men’s Wearhouse purchased black leather belts for $15.99 each and priced them to sell
for $29.99 each. What was the markup on the belts?
The basic formula applies: Markup = Retail – Cost
Chapter 14 – Retail Pricing
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10. Answer the following: (a) The Limited is planning a new line of leather jean jackets for
fall. It plans to retail the jackets for $100. It is having the jackets produced in the
Dominican Republic. Although The Limited does not own the factory, its product
development and design costs are $400,000. The total cost of the jacket, including
transportation to the stores, is $45. For this line to be successful, The Limited needs to
make $900,000 profit. What is its break-even point in units and dollars? (b) The buyer
has just found out that The GAP, one of The Limited’s major competitors, is bringing
out a similar jacket that will retail for $90. If The Limited wishes to match The GAP’s
price, how many units will it have to sell?
(a) In the example of The Limited,
Product development and design costs could be taken as fixed costs.
Chapter 14 – Retail Pricing
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Chapter 14 – Retail Pricing
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ADDITIONAL RETAIL MATH/PRICING PROBLEMS
1. A store sold the following items for the day: 2 sweaters at $39, 16 pairs of jeans at $59, 2
purses at $29 and 2 suits at $169. What are the gross sales for the day?
2 x 39=$78
2. Using the problem above, besides the gross sales, the store had customer returns and
allowances: 1 jean returned at $59, 2 skirts at $39. They also had to give a discount of 10% on a
$169 suit because it was soiled. What were the customer returns and allowances for the day?
1@$59 =$59
3. The store wants to calculate the customer returns and allowances as a percentage of sales.
What is this percent?
4. Using the store above, what were the gross sales for the day?
5. The buyer wants to know her cost of inventory sold. She purchased the jeans at $19, sweaters
at $9, jeans at $27 and suits at $67. What was her cost of inventory sold on this day?
2x$19= 38
6. What is the gross margin, using the number calculated above?
7.
Chapter 14 – Retail Pricing
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The direct expenses for the month included the following: $200 for advertising, $500 for
salaries, and $200 in rent expenses for the month. What were the direct expenses for the month?
What were the direct expenses for the day, assuming a 31 day month?
8. Indirect expenses during the month included: $75 for water, $89 for electricity, $60 for
insurance. What were the indirect expenses for the month? For the day, assuming a 31 day
month?
9. What would be the total operating costs in this problem for the day?
10. What is the profit for this store on this particular day?
11. A buyer wants to calculate her profit for the month. She knows the following information:
The store sold $34,600 worth of merchandise
12. What is the gross margin if the store had net sales of $3,267 and cost of inventory sold of
$1346?
13. A store had indirect expenses for the month of $500 for advertising, $30 for security
monitoring, and $75 for insurance. What would the direct expenses be for a day (when there are
30 days in the month?)
Chapter 14 – Retail Pricing
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14. A buyer wants to know her mark-up on a purchase. She purchased 25 sweaters at $9 and will
sell them for $25. She also purchased 45 pairs of jeans at $21 and will sell them for $45. What
is her total dollar markup in dollar and percent for this purchase?
Cost:
15. A buyer realized several sweaters were not selling well. As a result, she marked them down
from $58 to $38. There were 30 sweaters she marked down. What is the total dollar markdown?
What is the total dollar markdown in percent?
16. A store had average markdowns last year of 21%. The projected sales are $230,000.
Assuming she is calculating based on a seven month season, what is her planned markdowns?
17. A store had sales of $203,562 for the year. Their average stock was $57,640. What was their
turnover for the year?
18. A buyer decides to use the weeks of supply method to develop her buying plan. Her planned
sales are $460,000 and her desired turnover is 4. What should her weeks of supply be for the
coming year?
Chapter 14 – Retail Pricing
19. A buyer has determined he desired level of stock per month is $12,800. she plans to have
sales of $5,600 for that month. What would her basic stock requirements be for the month?
20. A buyer has planned purchases (or desired inventory) of $241,571. She has already ordered
$46,798. She has received $87,623 worth of merchandise. What is her current open to buy?
21. The cost of a new CD album is $8.75. The buyer plans to make an initial markup up of 25%
on the retail price. What should the retail price be?
22. The initial selling price for a blouse is $25. The cost was $14. What was the initial markup
on retail?
23. A belt was originally priced a $17 and put on sale for $12. What was the markdown
percentage on retail?
24. The cost of bicycle is $200. The initial markup on retail is 40%. After offering the bicycle
at the initial selling price, the bicycle was markdown by 20% and it sold at that price?
(a) What was the eventual selling price for the bicycle?
(b) (1) What was the maintained markup?
25. A woman’s dress suit was originally priced at $250. The first markdown was 20% on retail
and the second markdown was an addition 30%. What is the selling price of the suit after the
second markdown?
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26. (a) A buyer for men’s ties wants to have a maintained markup of 40%. The buyer forecasts
that the reduction as a percent of sales will be 13%. What should the initial markup be?
(b) In the above example, if the cost of the ties is $12, what would be the initial selling price?
27. A buyer orders 500 cotton sweaters at a cost of $20 per sweater.
(a) What is the cost for all of sweater when they are sold?
(b) If the buyers wants to have a maintain markup of 50%, what is the total sales dollars that
must be generated by the sale of all 500 sweaters?
(c) The buyer sets the initial selling price for the sweaters at $45. 200 sweaters are sold at that
price. How many sales dollars were generated by the sales of the initial 200 sweaters?
(d) How many sales dollars must be generated by the remaining 300 sales to achieve a
maintained markup of 50%?
(e) Sales of the sweaters are slowing and thus the buyer is going to mark them down. What does
he need to sell each of the remaining 300 sweaters at realize a 50% maintained markup?
(f) How much of a markdown on retail can the buyer take to realize a 50% maintained markup
on the sales of all 500 sweaters?
28. A buyer for women hosiery is planning to buy for merchandise to be sold during the summer
season that will generate retail sales of $150,000. The buyer wants to have a maintained markup
of 34% on retail for summer hosiery sales. Reductions will be very small and can be ignored.
The buyer has already spent $53,250 for merchandise that will generate $75,450 at retail.
What markup does the buyer need to have on the remainder of the planned purchases to realize
the overall markup of 34%?
Chapter 14 – Retail Pricing
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Sales needed at end of season = $150,000 COGS at season end = (1-.34) x 150,000 =
ONLINE LEARNING CENTER
Pricing
The pricing module contains four sections that complement this chapter.
1. Markup Percentage
2. Maintain Markup and Initial Markup
3. Breakeven Analysis
4. Markdown Simulation (Max Margin’s Markdown Challenge)
The Max Margin’s Markdown Challenge was developed by Oracle. This section of the
Online Learning Center sets up the scenario that the student has been hired as a
Chapter 14 – Retail Pricing
14–30
This exercise, when used in the classroom, is best done in groups because of the group
learning that takes place. Groups of two to three seem to work best. Have each group
bring their computer to class. The room must be Internet accessible.
The game has two modes of operation. In the “regular mode,” students have five minutes
to make the first decision, and one minute to make each subsequent decision. We find
The following instructions were prepared by Professor Jennifer Ashman at University of
Michigan. It is very useful to provide these instructions prior to the class.
Max Margin’s Markdown Challenge
The purpose of this game is to introduce you to the benefits of using a power tool to make
markdown decisions. The power tool employs merchandise markdown analysis and
optimization to generate higher gross margin, better sell-thru, and a bigger bonus from your
markdown decisions.
You will have two rounds to beat buyer superstar Max Margin.
Chapter 14 – Retail Pricing
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First page: Enter any name
Choose
a Name:
vs.
Your goal is to maximize your Gross Margin Dollars, and sell-thru (inventory clearance), for
the following items, over the course of a 15-week selling period.
Item Name
Cost
Initial Retail
Salvage Cost
Receipt Units
Women’s Leather Jacket
$208.00
$520.00
$104.00
6,850
Fashion Purse
$900.00
$1,800.00
$0.00
630
Chapter 14 – Retail Pricing
14–32
Week: 1
Time Left For This Week:
4:43
MD Action
(For This Week)
Weekly Selling Report (for last week‘s sales)
Item#
Item Name
Orig Price
Cur Price
Cum Sales
Cum ST%
LW Sales
LW ST%
WOS
Inv
Inv $’s
NOMD
25%
50%
1
Women’s Leather Jacket
$520.00
$520.00
456
6.7%
456
6.7%
14.0
6394
$3,324,880
3
Flower Vase
0.6%
0.6%
1442
4
Deluxe Propane Grill
0.1%
0.1%
1799.0
8995
$4,497,500
5
Fancy Dinner Set
$400.00
$400.00
3.8%
3.8%
25.5
1251
2
Fashion Purse
$1,800.00
$1,800.00
24
3.8%
24
3.8%
25.3
606
$1,090,800
Bonus:
Bonus over gross margin dollar plan.
Cum Sales:
Total sales from beginning of period to date.
Cum ST:
(Cumulative Sell Through) Total sales percent from beginning of selling season until today.
Cur Price:
Current retail price, after markdown.
EOW Inv Units:
End of week inventory units.
Inv $’s:
End of week inventory dollars.
(Gross Margin Dollars) Net Sales – (cost of goods sold + salvage costs).
(Gross Margin Percent)Ratio of Gross Margin vs Net Sales.
Inventory:
End of week inventory units.
Item Cost:
Cost per item.
LW Sales:
(Last Week Sales) Sales units for last selling week.
LW ST%:
(Cumulative Sell Through Percent) Last week’s percent sales units vs. the beginning of week inventory.
(No Markdown)
Markdown taken to maximize gross margin.
Units of an item received for a selling season.
Round 1 MD:
Your markdown decisions in first round.
Round 2 MD:
Your markdown decisions in second round.
Sales Dollars:
Net Sales.
Sales Units:
Units Sold.
Salvage Cost:
How much you’ll make on an item if you just get rid of it (i.e., sell to discount store).
Sell-Thru:
Percent of inventory sold.
WOS:
(Weeks of Supply) inventory / average sales units. Number of weeks of inventory remaining, assuming continuing selling rate.
Chapter 14 – Retail Pricing
You will play 15 rounds with Max Margin, and after all 15 weeks are complete, you will get a
final score. See below.
Item#
Item Name
Ending Inv
GM%
GM$
Your GM Dollars / Max’s GM Dollars
1
Women’s Leather Jacket
0
46.9%
$1,256,320
88.7%
2
Fashion Purse
0
39.2%
73.9%
3
Flower Vase
0
53.9%
78.2%
4
Deluxe Propane Grill
0
30.4%
35.5%
5
Fancy Dinner Set
0
44.6%
67.1%
43.0%
$2,490,557
You have potential!
Your Score for All Items
(Percent of Max’s Gross Margin Dollars)