Trade Discounts, Freight, and Markup on Selling Price
Maple & Main, a small clothing boutique, is pricing a new line of winter jackets. The wholesaler's list price is $85 per jacket. The trade-discount series is 20/10/5, and Maple & Main pays freight of $4.50 per jacket. The owner wants a 45% markup on selling price to cover rent, staff, and profit. A competitor two blocks away sells a comparable jacket for $119.99. The boutique expects to sell 60 jackets this season. The owner is unsure whether the 45% target should be applied to cost or to selling price and has heard both used in retail. She also wonders whether matching the competitor at $119.99 would exceed her markup goal or whether she should stay at her calculated price and compete on service. All jackets are purchased outright; there are no returns or additional handling costs.
1. Compute the net cost per jacket after trade discounts and freight.
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Trade discounts are sequential, not added. Apply each discount to the remaining balance:
After 20%: $85 x 0.80 = $68.00. After 10%: $68.00 x 0.90 = $61.20. After 5%: $61.20 x 0.95 = $58.14.
Add freight: $58.14 + $4.50 = $62.64 net cost per jacket.
A common error is to add 20% + 10% + 5% = 35% and take 35% off $85, which gives $55.25. That understates cost by $2.89 before freight and by $7.39 after freight, because each discount applies to a smaller base.
2. Compute the selling price under a 45% markup on selling price and under a 45% markup on cost.
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Markup on selling price: cost is 55% of selling price because 100% - 45% = 55%. Selling price = cost / 0.55 = $62.64 / 0.55 = $113.89 (rounded). Markup amount = $113.89 - $62.64 = $51.25. Check: 45% x $113.89 = $51.25.
Markup on cost: selling price = cost x (1 + 0.45) = $62.64 x 1.45 = $90.83. Markup amount = $90.83 - $62.64 = $28.19.
The two interpretations differ by $113.89 - $90.83 = $23.06 per jacket. The owner's target of 45% on selling price is the more demanding pricing rule and produces the higher price.
3. Evaluate pricing at $119.99 versus $113.89, including total gross profit for 60 jackets.
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At $119.99, markup on selling price = ($119.99 - $62.64) / $119.99 = $57.35 / $119.99 = 47.8%. This exceeds the 45% target. Gross profit per jacket = $57.35; for 60 jackets = $3,441.00.
At $113.89, markup on selling price = ($113.89 - $62.64) / $113.89 = $51.25 / $113.89 = 45.0%. Gross profit per jacket = $51.25; for 60 jackets = $3,075.00.
Matching the competitor adds $6.10 per jacket and $366.00 total gross profit. It also meets the markup goal. However, $119.99 is not undercutting the competitor; it is matching. If demand is price-sensitive, $113.89 undercuts by $6.10 and still earns the target markup. If the boutique can justify service, alterations, or a stronger warranty, $119.99 is defensible.
Do not use the 45%-on-cost price of $90.83. It is far below both the target and the competitor and leaves $22.81 to $29.16 per jacket on the table. It could be a clearance price, but not a regular seasonal price.