Dec 3, 2010

Trade Discounts-Markup-Markdown- Trade Values- Trade Terms

DISCOUNT:
Discount is a reduction in price which the seller offers to the buyer.

TRADE DISCOUNT:
Amount of discount =    d × L
Where, d = Percentage of Discount
L = List Price
Net Price = L – Ld = L(1 – d)
Net Price = List Price – Amount of Discount 

MARKUP:
Markup is an amount added to a cost price while calculating a selling price.

Markup as Percentage of Cost (MUC):
Here markup is some percentage of cost price. For simplicity, it is also named as %Markup on cost. The relation between %markup on cost, cost price and selling price is:
 
Selling Price = Cost price + (Cost price × %Markup on cost)
                    = Cost price (1 + %Markup on cost)

Markup as Percentage of Sale price (MUS):
Here markup is some percentage of selling price. For simplicity, it is also named as %Markup on sale. The relation between %markup on sale, cost price and selling price is:
 
Selling Price = Cost price + (Selling price × %Markup on sale)
                   
Cost price = Selling price – (Selling price × %Markup on sale)
                 = Selling price (1 – %Markup on sale)

Rs Markup:
Markup in terms of rupees is called Rs markup. The relations between Rs markup, cost price and selling price are:

    1.   Selling Price = Cost price + Rs Markup
    2.   Rs Markup = %Markup on cost × Cost price
    3.   Rs Markup = %Markup on sale × Selling price

For example:
The cost price of certain item is 80Rs and its selling price is 100Rs. Then
Rs Markup = Selling price – Cost price
                  = 100 – 80
                  = 20 Rs

MARKDOWN:
Markdown is a reduction from the list/cost price.

SERIES TRADE DISCOUNT:
This refers to the giving of further discounts as incentives for more sales. Usually such discount is offered for selling product in bulk.

L = List price = 100
D = discounts

    Net price = L(1-D1)(1-D2)(1-D3)   
Single equivalent discount rate = L – Netprice =? %
Rs. Discount = (0.2787)(20000)
                             = 5,574 Rs


TRADE DISCOUNT-EXAMPLE 2
Find the single discount rate that is equivalent to the series
15%, 10% and 5%.
TradeDiscount
Apply the multiple discounts to a list price of Rs. 100.
Net price = (1-d1)(1-d2)(1-d3)
               = 100(1 -15%) (1 - 10%) (1 - 5%)
               =100(0.85) (0.9) (0.95)
               = 100(0.7268)
               = 72.68
% Discount = 100 - 72.68
                   = 27.62%

CASH DISCOUNT:
Cash Discount is allowed on Invoices, Returned Goods, Freight, Sales Tax and A common business phrase for a cash discount is "3/10, net/30," meaning that a 3% discount is offered if the amount due is paid within 10 days; otherwise 100% of the amount due is payable in 30 days

CASH DISCOUNT-EXAMPLE:
Invoice was dated May 1st. The terms 2/10 mean that 2% discount is offered if invoice is paid up to 10thMay.
What is the net payment for invoice value of Rs. 50,000 if paid up to 10th May?
Cash Discount
N = L(1 – d)
= 50,000(1-0.02)
= 50,000(0.98)
= 49,000 Rs.

DISCOUNT PERIODS:
Discount Periods are periods for the buyer to take advantage of Discount Terms.

CREDIT PERIODS:
Credit Periods are periods for the buyers to pay invoices within specified times.

PARTIAL PAYMENTS:
When you buy on credit and have cash discount terms, part of the invoice may be paid within the specified time. These part payments are called Partial Payments.
You owe Rs. 40,000.
Your terms were 3/10 (3% discount by 10th day).
Within 10 days you sent in a payment of Rs. 10,000.
Rs. 10,000 was a part payment.
How much is your new balance?
First we will find the amount that if 3% discount is given on it, the net amount is 10000Rs.
Let that amount is t. Then
10000 = t (1 – 0.03)
This implies,    t =      10000    
                                (1 – 0.03)
Thus, t = 10309Rs
This means that although you pay 10,000Rs, due to 3% cash discount 10309Rs among 40,000Rs is paid.
Hence the new balance = 40000 – 10309 = 29691Rs.

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