V5.252 Mark-up computations
It is likely that most retail businesses have a definite policy with regard to their profit margins, albeit an unconscious one. Thus a newsagent will charge the cover price for newspapers and magazines; an electrical retailer may charge the manufacturer's recommended price, or offer a specific discount thereon; a publican may follow the prices charged by managed houses operated by his brewer; and a restaurateur may add a fixed mark-up to the basic cost of his ingredients. A mark-up computation makes use of these patterns and uses a trader's purchase records as a starting point for the calculation of hypothetical sales for a given period.
Hypothetical sales represent the cost of goods sold during the period plus the calculated gross profit thereon, allowance being made for various imponderable factors which reduce gross profit. The calculation may be expressed by the following formula:
V = the value of hypothetical sales
P = cost of goods purchased for resale during the period
L = cost of 'shrinkage' during the period arising from waste, pilferage, gift, obsolescence and other causes
M = average mark-up applied by the trader expressed as a decimal
R = value of reductions in selling price made during the period, eg by way of selective discounts and bargain sales
The cost of goods purchased for resale during the period is ascertained from the trader's accounting records. It may be necessary to sub-analyse the total between various classes of goods to provide the necessary weights used in calculating average mark-up (see post).