Contemporary Business Mathematics
with Canadian Applications
Thirteenth Edition
Chapter 6
Trade Discounts, Cash
Discounts, Markup, and
Markdown
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Objectives
6.1 Solve problems involving trade discounts.
6.2 Calculate single rates of discount for a discount series.
6.3 Apply methods of cash discount.
6.4 Solve problems involving markup based on either cost
or selling price.
6.5 Solve problems involving markdown.
6.6 Solve integrated problems involving discounts, markup,
and markdown.
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Trade Discounts, Cash Discounts,
Markup, and Markdown
• Determining a suitable selling price for each product or
service is crucial for long-term sustainability.
• Cost-plus methodology: marking up the cost of each
product or service by a certain percentage that is large
enough to cover expenses and still leave a respectable
profit.
• Other organizations select their desired profit percentages
first, and then work backwards to set their prices.
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Supply Chain
• The supply chain defines the channels or stages that a
product passes through as it is converted from a raw
material to a finished product purchased by the consumer.
• In some supply chains, the distributor and wholesaler are
separated.
• In other supply chains, the manufacturer also serves as
the wholesaler.
• Within the supply chain, all the channels must profit from
the product to remain in business.
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Supply Chain
• Each channel applies a markup above its cost to buy the
merchandise.
• A manufacturer or supplier can set a list price and then
offers a trade discount or a series of trade discounts.
• Any of the channels within the supply chain may offer a
cash discount to encourage prompt payment for the
product.
• When the product is sold to the consumer, the regular
selling price may be marked down or discounted to a sale
price.
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Supply Chain Terminology
Figure 6.1 Terminology Used in the Supply Chain
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Selling Price
• Components of the selling price.
PROFIT
Selling Price Expenses
Cost
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Determining Cost with Trade
Discounts
• A trade discount is a reduction of a list price or
manufacturer’s suggested retail price (M SRP).
– Usually stated as a percent of the list price or M SRP.
• Trade discounts are used by manufacturers, distributors,
and wholesalers as pricing tools to
a) determine different prices for different levels of the
supply chain;
b) communicate changes in prices;
c) enable changes in prices.
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Trade Discount Formulas
Trade Discount Abbreviations
Rate of List A = dL
Amount of Discount = ×
Discount Price
Amount of Discount A
List Price = L=
Rate of Discount d
Trade Discount Abbreviations Blank
Amount of Discount A
Rate of Discount = d=
List Price L
Net Price = List Price − Amount of Discount N=L−A
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Trade Discount Formulas
This diagram helps you remember the various forms of the
amount of discount formula A = dL.
Variables on the same line are multiplied together.
Variables on different lines are divided.
For example, in solving for d, note that A is above the L.
d = A/L
L = A/d.
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Using Trade Discount Formulas
• A product is listed at a price of $80.00 and is subject to a
trade discount of 25%. What is the net price?
• N=L–A
• Amount of discount = $80 × 0.25 =$20.00.
• Net Price = $80 – 20.00 = $60.00
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Using Trade Discount Formulas
• The value of a 20% discount is $25.00. Calculate the list
price.
𝐴
• 𝐿=
𝑑
$25
• List Price = = $125.00
0.20
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Using Trade Discount Formulas
• Calculate the rate of discount for a TV set listed at $880
less a discount of $150.
𝐴
𝑑=
𝐿
$150
• Rate of discount d = = 0.170455 = 17.05%
$880
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Net Price Factor
• Instead of computing the amount of discount and then deducting this
amount from the list price, the net price can be found by using the
more efficient net price factor approach.
• N = L – A (where A = dL)
• N = L – dL
• N = L(1-d) where Net Price Factor = (1-d)
Formulas
Net Price
Net Price = List Price ×
Factor (NPF)
Net Price Factor NPF = 1 − d
𝐍=𝐋 𝟏−𝐝
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Computing Net Price using the Net Price
Factor
• Calculate the net price if the list price is $36, and the discount is
15%.
•𝐍=𝐋 𝟏−𝐝
Net price = $36 (1 − 0.15)
= $36 × 0.85
= $30.60
Note: If you receive a discount of 15%, you end up paying 85% of
the list price.
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Discount Series
• A manufacturer may offer two or more discounts to
different members of the supply chain.
– If a list price is subject to two or more discounts, these
discounts are called a discount series.
– Additional discounts may be offered to encourage
large-volume orders and early orders for seasonal
items.
– Additional discounts may be offered to different
members of the merchandising chain.
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Discount Series Formulas
Formulas
NET PRICE = L (1 − d1)(1 − d2)(1 − d3) … (1 − dn)
For every discount series, a
single equivalent rate of discount (SERD) exists
Single Equilavent Rate
of Discount for a = 1 − NPF for the Discount Series
Discount Series
SERD = 1− [(1 − d1)(1 − d2)(1 − d3)…(1 − dn)]
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Discount Series
An item listed at $150 is subject to the trade discount series
20%, 10%, and 5%. Determine the net price.
NET PRICE = L (1 − d1)(1 − d2)(1 − d3) … (1 − dn)
Net Price = $150 (1 − 0.20) (1 − 0.10) (1 − 0.05)
= $150(0.80)(0.90)(0.95)
= $102.60
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Discount Series
• Another approach
List Price $150.00
Less 20% Discount 30.00
Net Price after First Discount 120.00
Less 10% Discount 12.00
Net Price after Second Discount 108.00
Less 5% Discount 5.40
Net Price after Third Discount $102.60
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Discount Series
• A manufacturer sells kayaks to dealers at a list price of $2,100 less
40%, 10%, and 5%. Determine the Net Price, the Amount of Discount,
and the single equivalent rate of discount (SERD).
Net Price = List Price × NPF
NET PRICE = L 1 − d1 1 − d2 1 − d3 ⋯ 1 − dn
Net Price = $2100 (1 − 0.40) (1 − 0.10) (1 − 0.05) = $1,077.30
Amount of Discount = List Price – Net Price
= $2,100 – 1,077.30 = $1,022.70
SERD = 1 − 1 − d1 1 − d2 1 − d3 ⋯ 1 − dn
SERD = 1 − 1 − 0.40 1 − 0.10 1 − 0.05 = 1 − 0.513
= 0.487 = 𝟒𝟖. 𝟕%
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Discount Series – Finding SERD
Example: An item was listed originally for $850. Then it was
discounted to $700, and then to $550. What was the SERD?
SERD = 1 − 1 − d1 1 − d2 1 − d3 ⋯ 1 − dn
Note: We have to determine the individual discounts first
d1 = 150/850 = 0.176470588 d2 = $150/700 = 0.214285714
SERD = 1 - [(1-0.176470588) (1- 0.214285714)] = 0.352941176
= 35.29%
There is a shortcut:
SERD = Total discount given
original price
SERD = ($850 - $550) / $850
SERD = 0.352941176
SERD = 35.29 %
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Payment Terms and Cash Discounts
• Among each other, businesses usually sell goods on credit
rather than for cash. An invoice for the goods is sent, and the
seller specifies payment terms on the invoice.
• The business selling the goods can offer a cash discount to
encourage prompt payment.
All payment terms have three things in common:
1. The rate of discount: a percent of the net amount of the
invoice (the amount remaining after trade discounts are
deducted).
2. The discount period: the time period when the cash
discount can be applied.
3. The credit period: the time period when the invoice
must be paid.
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Cash Discounts
• Offered in a variety of ways:
1. Ordinary dating, whereby payment terms are based
on the invoice date.
2. End-of-month dating, or E.O.M. dating.
▪ Shift the invoice date to the last day of the month.
3. Receipt-of-goods dating, or R.O.G.
▪ Used when the transportation of the goods takes a
long time.
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Sample
Sales Invoice
To count the number of
days in the discount
period, the invoice date
is considered ”day 0”.
May 3 is “day 1”
May 12 is “day 10”
Payments received up
to and including May
12 are entitled to the
2% discount.
The balance of the
invoice is due June 1
(day 30).
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Ordinary Dating of Invoices
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Ordinary Dating of Invoices
• Commonly used payment terms are 2/10, n/30 (read “two ten, net thirty”)
– if the payment is made within 10 days of the date of the invoice, a
discount of 2% may be deducted from the net amount of the invoice.
– otherwise, a payment of the net amount of the invoice is due within
30 days.
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Ordinary Dating of Invoices
• Determine the payment needed to settle an invoice with a
net amount of $950, dated September 22, terms 2/10,
n/30, if the invoice is paid
i. On October 10;
ii. On October 1.
Figure 6.5 Discount and Credit Periods—Example 6.2A,
Ordinary Dating
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Ordinary Dating of Invoices
• Ten days after September 22 is October 2. The discount
period ends October 2.
i. October 10 is beyond the last day for taking the
discount. The full amount of the invoice of $950 must
be paid.
ii. October 1 is within the discount period. The 2%
discount can be taken.
Amount paid = Net amount − 2% of the net amount
= 950 − 0.02(950)
= 950 − 19.00
= $931
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End-of-the-Month Dating of Invoices
• Commonly the credit period (such as n/30) is not stated.
• The E.O.M. abbreviation has the effect of shifting the
invoice date to the last day of the month.
• This would indicate that the 2% discount may be taken
within the first 10 days of the next month
– In our example, “2/10, n/30 E.O.M.” would be written
“2/10 E.O.M.
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End-of-the-Month Dating of Invoices
• An invoice for $1233.95 dated July 16, terms 2/10 E.O.M.,
is paid on August 10. What is the amount paid?
– The abbreviation E.O.M. means that the invoice is
treated as if the invoice date were July 31. August 10
is the last day for taking the discount.
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Receipt-of-Goods Dating
When the invoice states R.O.G, the last day for taking
the discount is the stipulated number of days after the
date the merchandise is received, rather than the
invoice date.
• Example: Hansa Import Distributors has received an
invoice of $8465.00 dated May 10, terms 3/10, n/30
R.O.G., for a shipment of clocks that arrived on July 15.
• What is the last day for taking the cash discount and how
much is to be paid if the discount is taken?
• Last day for taking the discount is ten days after receipt of
the shipment → July 25.
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Discount and Credit Periods—
Example Receipt-of-Goods Dating
Hansa Import received an invoice of $8,465.00 dated May 10, terms 3/10,
n/30 R.O.G., for a shipment of clocks that arrived on July 15
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Partial Payment – reducing debt “by” $
When a business pays part of an invoice within the discount period,
they are entitled to a cash discount on the partial amount paid.
Example: Royal Roads University has received an invoice of $2,780
dated August 28, terms 2/10. What payment must be made on September
5 to reduce the debt by $1,000?
Reducing the debt by $1,000 requires paying $1,000 less
the discount.
– Amount of the original invoice is $2,780
– Amount paid = $1,000(0.98) = $980
– Amount owing = $2,780 − 1000 = $1780
If the university pays $980 by September 5, it has reduced its debt
by $1,000 (even though less than $1,000 was paid).
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Partial Payment – reducing debt “to” $
When a business pays part of an invoice within the discount period, they
are entitled to a cash discount on the partial amount paid.
Example: Royal Roads University has received an invoice of $2,780
dated August 28, terms 2/10. What payment must be made on
September 5 to reduce the debt to $1,000?
Reducing the debt to $1,000 requires separating the debt into
two parts.
– The first part is $1,780 (discount is applied to the amount).
– The amount paid is $1,780(0.98) = $1,744.40.
– The balance of the debt is now $1,000.
If the university pays $1744.40 by September 5, it has reduced its debt to
$1,000 (even though less than $1780 was paid).
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Markup
• The primary purpose of operating a
business is to generate profits.
• The amount of profit depends on many
factors. The selling price must cover
1. the cost of buying the goods;
2. the operating expenses (or overhead) of
the business;
3. the profit required by the owner to stay
in business.
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Markup
Blank Blank Profit (P)
Selling Price (S) Markup (M)
Blank
Expenses (E)
Cost (C) Cost (C)
• Selling Price = Cost of Buying + Expenses + Profit
• S=C+E+P
M=E+P
Therefore
S=C+M
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Rate of Markup
• A markup may be stated in one of two ways:
1. as a percent of cost; or
2. as a percent of selling price.
• Computing the rate of markup involves comparing the
amount of markup to a base amount.
• Depending on the method used, the base amount is either
the cost or the selling price.
• The two methods produce different results, great care
must be taken to note whether the markup is based on the
cost or on the selling price.
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Rate of Markup
𝑹𝑨𝑻𝑬 𝑶𝑭 𝑴𝑨𝑹𝑲𝑼𝑷 𝑴𝑨𝑹𝑲𝑼𝑷 𝑴
• = = × 𝟏𝟎𝟎
𝑩𝑨𝑺𝑬𝑫 𝑶𝑵 𝑪𝑶𝑺𝑻 𝑪𝑶𝑺𝑻 𝑪
𝑹𝑨𝑻𝑬 𝑶𝑭 𝑴𝑨𝑹𝑲𝑼𝑷 𝑴𝑨𝑹𝑲𝑼𝑷 𝑴
• = = × 𝟏𝟎𝟎
𝑩𝑨𝑺𝑬𝑫 𝑶𝑵 𝑺𝑬𝑳𝑳𝑰𝑵𝑮 𝑷𝑹𝑰𝑪𝑬 𝑺𝑬𝑳𝑳𝑰𝑵𝑮 𝑷𝑹𝑰𝑪𝑬 𝑺
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Rate of Markup
Adealer bought personal computers for $1,850 less 32%, and 17%.
They were sold for $1,575.
a) What was the markup as a percent of cost?
b) What was the markup as a percent of selling price?
• Cost = 1,850(1 − 0.32)(1 − 0.17) = $1,044.14
• Markup = 1,575 − 1,044.14 = $530.86
530.86
a) = 0.508418 = 50.84% markup as % of cost
1044.14
530.86
b) = 0.337054 = 33.71% markup as % of sales price
1575.00
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Pay Attention to the Base of Markup
Selling Price = Cost + Markup S=C+M
• Calculate the selling price of an item costing $72 if the
markup is 40% of the cost.
Selling price = 72 + 0.40(72)
= 72 + 28.80 = $100.80
• Calculate the selling price of an item costing $72 if the
markup is 40% of the selling price.
Selling price = 72 + 0.40S
0.60S = 72
S = 72/0.60 = $120.00
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Markdown
• Reduction in the regular selling price of an article sold to a
customer.
• Stated as a percent of the regular price. Computed as a
discount.
• Cost of Buying + Expenses = Total Cost
• If an article is sold at a price that equals the total cost, the
business makes no profit, nor does it suffer a loss.
• Businesses prefer to sell at a price that is at least the
break-even price.
• If the price does not even cover the cost of buying the
item, the business suffers an absolute loss.
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Markdown Formulas
• Sale Price (reduced) = Regular Selling Price − Markdown
SR = S − MD
Where SR is the reduced price.
𝐑𝐀𝐓𝐄 𝐎𝐅 𝐌𝐀𝐑𝐊𝐃𝐎𝐖𝐍 𝐌𝐃
• = 𝐑𝐄𝐆𝐔𝐋𝐀𝐑 𝐒𝐄𝐋𝐋𝐈𝐍𝐆 𝐏𝐑𝐈𝐂𝐄 = 𝐒 × 𝟏𝟎𝟎
𝐌𝐀𝐑𝐊𝐃𝐎𝐖𝐍
• Sale Price = Regular Selling Price × NPF
• SR = S (1− md)
Markdown (MD)
Blank Blank Profit
Selling Price Markup
Expenses Sale Price (reduced)
(S)
Blank (SR)
Cost Cost
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Markdown Example
A bicycle originally priced at $195 was sold for $144.30.
a) What was the amount of discount?
b) What is the markdown rate?
Amount of discount
= $195 – 144.30 = $50.70
Markdown Rate
50.70
= × 100 = 26%
195
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Markdown Example
The Skishop sold a pair of ski boots, regularly priced at $245, at a
discount of 40%. The boots cost $96, and expenses are 16% of
the regular selling price.
a) For how much were the ski boots sold?
b) What was the total cost of the ski boots?
c) What operating profit (or loss) was made on the sale?
a) Reduced price SR = S (1− md)
= 245 x 0.6 = $147.00
b) Total Cost = Cost of buying + Expenses
= 96 + (0.16) x 245 = $135.20
c) Profit = Sale price – Total cost
= 147.00 – 135.20
= $11.80 ( a profit)
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Summary
• Trade discounts facilitate the pricing of goods along the
merchandising chain from the manufacturer to the
consumer.
• Cash discounts are price reductions which encourage
prompt payment of invoices.
• Markups allow the retailer to set a price to cover cost,
expenses, and profit.
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