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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 Page 1 of 7 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)?” Page 2 of 7 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). Page 3 of 7 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 Page 4 of 7 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%; Page 5 of 7 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 Page 6 of 7 % 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 Page 7 of 7