Tuesday, November 8, 2016

What Does Mark-up Cover

Cocktail, Drink, Glass, Alcohol  Yesterday, the last thing I looked at was mark-ups but have your students ever asked why we even discuss markup?  Where does all that money go and are there businesses with bigger markups than others?

Mark-up is used to pay for the rent, benefits, employees, supplies and profit.  I've never really discussed it in detail with my students because I don't usually take the time.

In most retail businesses the standard markup is considered to be 50% which is just doubling the price.  The logic is if you buy a can of soda for $1 and sell it for $2, there is a 50% markup because $1 is half of $2.  This is a great way to show the logic behind the 50% number but mathematically its really a 100% markup because you start with the base number and calculate it that way. 

Add into this topic the idea that a business in rural areas are probably going to have a higher markup than an urban area due to higher transportation costs, fewer customers and other costs.  I live in a place where they have to barge in the fuel before the river freezes in the fall.  By the time the store sells it, it is about $6.25 per gallon where if I were in Anchorage, it would only be around $3.50 per gallon.  Over double the cost.  A half gallon of ice cream is sold for $12 to 15 dollars due to paying air freight to get here.

Most everything sold in the world has a markup but so do services such as temporary agencies.  They charge more than the rate the worker is paid.  The markups are between 20 and 60% or higher but cover the benefits of the worker and money for the agency so it can pay all its bills and make a profit.  The markup depends on the number of workers needed and if the worker has very specialized skills. Someone with specialized skills might have a 200 to 300 percent markup.

The Small Business Administration has a great seven page worksheet you could use in the classroom to show how one goes about identifying fixed costs, variable costs and other factors to determine the amount of markup one should use.  The first two pages are the only ones needed and the students could look up costs or call around to get prices or you could provide the numbers.

Give it a thought because this is a way to get students to apply markups in a real situation.