11.11 Maintained Markup
Maintained Markup
A price change results in a markup change. Whenever a selling price is reduced to a sale price, it has been demonstrated that the amount of the markup decreases (from to ) by the amount of the discount (). This means that some of the products are sold at full markup and some at a partial markup. For businesses, the strategic marking up of a product must factor in the reality that they do not sell every product at the same level of markup. Therefore, if a business must achieve a specified level of markup on its products, it must set its price such that the average of all markups realized equals its markup objective. The average markup that is realized in selling a product at different price points is known as the maintained markup.
To understand the formula, assume a company has 100 units for sale. From past experience, it knows that 90% of the products sell for full price and 10% sell at a sale price because of discounts, damaged goods, and so on. At full price, the product has a markup of $10, and 90 units are sold at this level, equalling a total markup of $900. On sale, the product is discounted $5, resulting in a markup of $5 with 10 units sold, equalling a total markup of $50. The combined total markup is $950. Therefore, the maintained markup is $950 ÷ 100 = $9.50 per unit. If the company’s goal is to achieve a $10 maintained markup, this pricing structure will not accomplish that goal. Formula 1.13 summarizes the calculations involved with maintained markup.
Formula 1.13 – Maintained Markup
is Maintained Markup: The maintained markup is the average markup in dollars that is realized after factoring in the quantity of units sold and differing levels of markup. In its simplest form, this formula is an applied version of Formula 2.4 on weighted average discussed in Chapter 2.
is Markup Amount: The markup amount represents the amount of markup realized at the regular selling price for the product. If you do not know this amount directly, calculate it using any of the markup formula (Formulas 1.6 through 1.9).
is Full Markup Output: This variable represents the number of units sold at full markup (the regular selling price). It could be an actual or forecasted number of units sold. This variable acts as a weight: If you do not know actual unit information, then you can instead assign a forecasted weight or percentage.
is Partial Markup Output: This variable represents the number of units sold at the reduced markup (the sale price). If you do not know unit information, use a forecasted weight or percentage instead.
is Markdown Amount: The markdown amount represents the amount by which the regular selling price has been reduced to arrive at the sale price. If you do not know this amount directly, calculate it using any of the markdown formulas (Formulas 1.11a, 1.11b, or 1.12).
Formula 1.13 assumes that only one price reduction applies, implying that there is only one regular price and one sale price. In t