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Module 6: Pricing
(10 hours)
Introduction to Module 6
Welcome to the sixth module of Grade 10 Retailing. This module is made up of two
lessons. You will learn about pricing procedures, and techniques and uses of pricing. You
will also be completing two assignments, which you will mail to your tutor/marker along
with your completed assignments from Module 5.
Here is a list of the titles of each of the lessons in this module:
 Lesson 1 – Pricing Procedures
 Lesson 2 – Pricing Strategies
Assignments
This table lists all of the assignments that you will have to complete in this module.
Lesson
1
2
Assignment
Number
6.1
6.2
Assignment Name
Pricing Procedures: Parts 1 - 5
Pricing Strategies
Lesson 1 Pricing Procedures
(7 hours)
Lesson Focus
In the last Module, you learned how retailers purchased items to sell. In this lesson, you will learn
how retailers set the prices for those items. After completing this lesson, you will be able to:
1. identify the need and importance of a systematic pricing procedure, i.e., publisher – invoices,
quotes (SLO 6.1.1)
2. calculate the relationships between revenues (sales), costs, and profits by: (SLO 6.1.2)
 analyzing the contents and purpose of an income statement
 analyzing the contents and purpose of a balance sheet
3. calculate mark-up on retail value of merchandise (SLO 6.1.3)
 marking-up on cost $ and calculating a percentage %
4. calculate mark-down on retail value of merchandise (SLO 6.1.4)
 marking-down on cost $ and calculating a percentage %
In the last module, you learned about marking inventory. Before inventory is marked, a business
must decide on what price to charge for the items. Pricing is setting a retail dollar amount for items.
Systematic Pricing Procedures
(SLO 6.1.1)
Pricing merchandise is always a challenge for a retailer. Pricing goods too low results in lost profit
potential, and pricing goods too high results in lower profits because of reduced sales volume. For
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every item sold, there is an ideal selling price and if your goods are selling you know you have hit
the mark.
When a retailer is first considering pricing an item, they need to include the following factors to
make a profit on this item:
1. The cost of the item
2. The expenses of getting the item to the store (shipping, insurance, etc.)
3. That item’s share of the other expenses, e.g., rent, wages, insurance, utilities
4. Financial objectives – how much profit does the retailer want or what kind of return on
investment are they hoping to achieve
5. Competition – retailers must be aware of their competitor’s prices
6. Customer acceptance – retailers must know their target market and know what their target
market is willing to pay
7. Supply and demand – how much in demand are particular goods and what is the supply of
those same goods
Supply and demand is very important for retailers to consider. Supply means how much
inventory is available. Demand is the quantity customer will buy at a given price.
The following points of Supply and Demand may affect pricing:
 If supply is low, prices will be high
 If supply is high, prices will be low
 If demand is high, prices will be high
 If demand is low, prices will be low
 If prices are increased, demand will decrease and if prices are decreased, demand will
increase
 Inelastic Demand: if prices go up on specific items such as staple goods (gasoline, milk,
etc.), the demand stays the same (it is inelastic) because gasoline and milk are every day
needs
 Elastic Demand: if prices go up or down on specific items such as designer clothing, the
demand will either go up or down (it is elastic) because consumers will buy the designer
clothing when it is cheaper but they will not buy it when it is expensive
Following is a supply and demand chart. For example, when bus fares go up, less people
take the bus, because consumers are not willing to pay more.
An income statement is also called an operating statement or the profit and loss statement. It shows
whether or not a business is profitable. In other words, an income statement answers the question:
“does the money coming in (revenue) cover the expenses with something left over (profit)?”
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Now is the time to complete Part 1 of Assignment 6.1. This part of the assignment will assist you in
understanding the need and importance of a systematic pricing procedure. It is found at the end of
this lesson.
Calculate the relationship between revenue (sales), expenses and profit (SLO
6.1.2)
There are two ways to calculate the relationship between revenue (sales), expenses, and
profit. One is by analyzing an income statement. The other is by analyzing a balance sheet.
1. Analyzing an Income Statement
Analyzing an income statement is the first way to calculate the relationship between revenue (sales),
expenses, and profit. An income statement summarizes the revenue and expenses of a business over
a specific period of time (one month, six months, a year, or longer). Here is an Income Statement
for the BRANDON JEANS & T-SHIRT COMPANY for one year.
--------------------------------------------BRANDON JEANS & T-SHIRT COMPANY
Income Statement
for the year ending 2008
REVENUE
Sales from Jeans
Sales from T-Shirts
TOTAL REVENUE
EXPENSES
Materials
Equipment Rentals
Wages
Accounting and Legal Fees
Advertising and Promotion
Insurance
Rent
Telephone / Internet / Utilities
TOTAL EXPENSES
$ 80,000
45,000
$125,000
$15,000
10,000
50,000
1,500
5,000
800
12,000
1,200
95,500
NET INCOME (or Net Loss)
$ 29,500
--------------------------------------------You can use this income statement to find out if the business made money or lost money by
following these three steps:
1. Add up revenues
2. Add up expenses
3. Subtract expenses from revenues. If the revenue is greater than the expenses, then the
business made a profit (net income). If the expenses are greater than the revenue, then the
business had a loss (net loss).
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Using the above income statement, subtract the total expenses ($95,500.00) from the total revenue
($125,000.00). For example, $125,000.00 - $95,500.00 = $29,500.00. The business made
$29,500.00 in net income for the 2008 year.
Income statements will vary (from business to business), because some of the categories will not
apply to every business and they will have to be deleted, and some new categories will have to be
added.
Assignment Icon
Now is the time to complete Part 2 of Assignment 6.1. In this part, you will learn the relationships
between revenues (sales), costs, and profits by completing an income statement. It is found at the
end of this lesson.
2. Analyzing a Balance Sheet
Analyzing a balance sheet is the second way to calculate the relationship between revenue (sales),
expenses, and profit. A balance sheet is a summary of the financial status of a company at a
particular time. It shows what assets the company has and what liabilities the company has and
gives the owner a clear picture of the amount of his or her equity (owner’s equity) in the company;
e.g., Assets = Liabilities + Owner’s Equity. Following is a description of what each of these are:



assets – what the business owns and what others owe to the business
liabilities – what the business owes to others
equity – how much the business owes to its owners
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Here is a Balance Sheet for the BRANDON JEANS & T-SHIRT COMPANY.
--------------------------------------------BRANDON JEANS & T-SHIRT COMPANY
Balance Sheet
December 31, 2008
ASSETS
LIABILITIES
Cash
$20,000
Accounts Payable
$15,500
(what the business owes to others)
Accounts Receivables
18,000
(what others owe the business)
Inventory
10,000
Supplies
5,000
Store Equipment and
Fixtures
12,500
$65,500
TOTAL ASSETS
TOTAL LIABILITIES
$15,500
OWNER’S EQUITY
Owner’s Capital (what the owner put
$50,000
into the business)
TOTAL OWNER’s EQUITY
$50,000
TOTAL LIABILITIES &
OWNER’s EQUITY
$65,500
--------------------------------------------In the above-mentioned balance sheet, the assets = the liabilities plus the owner’s equity. Looking at
this example you can see that both sides balance.
Balance sheets will vary (from business to business), because some of the categories will not apply
to every business and they will have to be deleted, and some new categories will have to be added.
As well, each business will have smaller or larger amounts of money listed under assets that is owing
to the business from others. Under liabilities, each business will have smaller or larger amounts of
money that they owe to others. Under owner’s equity, each business will show different amounts of
capital input by the specific owner.
Assignment Icon
Now is the time to complete Part 3 of Assignment 6.1. In this part, you will learn the relationships
between revenues (sales), costs, and profits by completing a balance sheet. It is found at the end of
this lesson.
Calculating Mark-up (SLO 6.1.3) (EXAM)
Mark up is when a store will price an item for more money than it cost to buy. WHY? Because the
store owner wants to make money on all goods and merchandise and therefore will sell items for a
higher selling price. Confectionary items such as chocolate bars are usually marked up by 50%;
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clothing can be marked up by 300% or sometimes more. It depends on the item as to how much the
mark up will be.
Example:
Cost
Mark Up
Selling Price
$10.00
5.00
$15.00
% Mark Up on Cost – Divide the Mark Up $5.00 by the Cost $10.00 and multiply by 100. Example:
$5.00 (Mark Up) x 100 = 50%
$10.00 (Cost)
% Mark Up on Selling Price – Divide the Mark Up $5.00 by the Selling Price $15.00 and multiply
by 100. Example:
$5.00 (Mark Up) x 100 = 33%
$15.00 (Selling Price)
Keystone Markup – businesses double the cost of the product to obtain its selling price. This is a
quick and easy method that can be used in some product situations, but NOT all. (EXAM)
Return on Investment – this is how much a business is making in comparison to what it is costing
the business to buy the products plus operate the business. For example, a seamstress might charge
$5.00 to sew a hem on a pair of pants. Assume that her expenses (equipment use, materials, wages,
rent, etc.) to sew the hem are $3.80. Subtract the $3.80 expenses from the $5.00 price and the $1.20
remaining is the profit. Divide the $1.20 by $3.80 to get the owner’s return on investment to sew the
hem. $1.20 / $3.80 = .30 or 30 % (percent).
Assignment Icon
Now is the time to complete Part 4 of Assignment 6.1. In this part, you will practice calculating
mark-ups. It is found at the end of this lesson.
Calculating Mark-down (SLO 6.1.4) (EXAM)
Mark down is when a store will price an item for less money than it cost to buy. WHY? Because
the store owner wants to MOVE all goods and merchandise especially if the items are just sitting
around and taking up shelf space. This shelf space could be put to better use for new products.
Also, mark downs are planned by the business to reduce the selling price of a product, usually to
take effect either within a certain period of time after seasonal inventory is received or at a specific
date.
Example:
Selling Price
Mark Down
Sale Price
$15.00
5.00
$10.00
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% Mark Down on Selling Price – Divide the Mark Down $5.00 by the Selling Price $15.00 and
multiply by 100. Example:
$5.00 (Mark Down) x 100 = 33%
$15.00 (Selling Price)
% Mark Down on Sale Price – Divide the Mark Down $5.00 by the Sale Price $10.00 and multiply
by 100. Example:
$5.00 (Mark Down) x 100 = 50%
$10.00 (Sales Price)
Basic Retailing Formulas
Cost + Mark Up = Selling Price
Selling Price - Cost = Mark Up
Selling Price – Mark Up = Cost
Break-Even Point
The break-even point is the point where the sales equal the expenses. There is no profit and no loss.
It is the number of units that must be sold in order to produce a profit of zero (but will recover all
associated costs such as fixed costs or costs that don't change (rent, property tax, insurance, etc.) and
variable costs or costs that may change (telephone, hydro, supplies, etc.) (EXAM)
Break-Even Formula
Break Even = Fixed Cost / (Unit Price - Variable Unit Cost).
Assignment Icon
Now is the time to complete Part 5 of Assignment 6.1. In this part, you will practice calculating
mark-downs. It is found at the end of this lesson.
Summary of Lesson 1
In this lesson you learned how to
 identify the need and importance of a systematic pricing procedure, i.e., publisher – invoices,
quotes
 analyzing the contents and purpose of an income statement
 analyzing the contents and purpose of a balance sheet
 calculate mark-up on retail value of merchandise
 calculate mark-down on retail value of merchandise
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