CH08_PPT trade discounts (1).ppt

Business Math, Eighth Edition
Cleaves/Hobbs
© 2009 Pearson Education, Inc. Upper Saddle River, NJ
07458 All Rights Reserved
8.1 BUYING AND SELLING
 By the time the product is purchased by the
manufacturer, distributed through the
wholesaler and offered for sale by the
retailer. Within the supply chain, all of the
channels prior to the consumer must make
a profit to remain in business.

Cleaves/Hobbs
Product flow

Cleaves/Hobbs
Consumer Retailer Wholesaler Manufacturer
List Price Net Price Net Price Cost
$80 $56 $40 $20
Price flow

Cleaves/Hobbs
 Large fast food chains such as McDonald's,
KFC and Popeye’s can go directly to the
manufacturers for most items manufactures
to their exact specifications for a contracted
price. They reduce their costs by eliminating
the distributors.

Cleaves/Hobbs
 COSTS DIRECTLY ATTRIBUTABLE TO THE
PRODUCT ( Product Costs)
 A. Raw Materials – 75% of the physical
appearance
 B. Direct Labor- payment for
manpower/human/machine labor
 C. Manufacturing Overhead- 25% and below of the
physical appearance

Cleaves/Hobbs
 Manufacturers, distributors and wholesalers
frequently offer trade discounts generally
based on the volume purchased.
 Trade discounts are list price reductions
that a business may offer to its customers.
 Trade discounts are calculated on the list
price per item, rather than on the total
amount due because different trade
discounts may be applied to different items.

Cleaves/Hobbs
8.1 Single Trade Discounts
 Find the trade discount using a single
trade discount rate; find the net price using
the trade discount.
 Find the net price using the complement of
the single trade discount rate.

Cleaves/Hobbs
Key Terms
 Suggested retail price, catalog price, list
price: three common terms for the price which
the manufacturer suggests an item be sold to
the consumer.
 Trade discount: the amount of discount that
the wholesaler or retailer receives off the list
price or the difference between the list price and
the net price

Cleaves/Hobbs
 Net price: the price the manufacturer or
retailer pays or the list price minus the
trade discount.
 Discount rate: a percent of the list price.
Key Terms

Cleaves/Hobbs
How to find the trade discount
 Using a single trade discount rate:
1. Identify the single discount rate and the
list price.
2. Multiply the list price by the single
discount rate.
 Trade discount = rate x list price

Cleaves/Hobbs
Look at this example
 Trade discount = rate x list price
Find the trade discount for a cd player that
retails at $120 and has a trade discount rate of
35%.
 Trade discount = 0.35 x $120
 Trade discount = $42
 What does the $42 mean?
 That the wholesaler or retailer will not pay $42
of the $120 list price.

Cleaves/Hobbs
Try these examples
 Find the trade discount for a rug that lists
for $290 and has a trade discount of 30%.
 $87
 Find the trade discount for styling gel that
lists for $18 and has a trade discount of
15%.
 $2.70

Cleaves/Hobbs
Find the net price
 Using the trade discount:
1. Identify the list price and the trade discount.
2. Subtract the trade discount from the list
price.
Trade discount = Rate x List Price
Net Price = List Price – Trade discount

Cleaves/Hobbs
 Find the net price of a desk that lists for
$320 and has a trade discount of 30%.
 Trade discount = 0.30 x $320 = $96
 Net price = List price – Trade discount
 Net price = $320 - $96 = $224

Cleaves/Hobbs
Try these examples
 Find the net price of a camera that lists for
 $132
 Find the net price of a patio table that lists
for $460 and has a trade discount of 20%.
 $368

Cleaves/Hobbs
Find the net price
 Using the complement of the single trade
discount rate.
 Complement of percent: the difference
between 100% and the given percent.
 Examples:
 The complement of 30% is 70%.
 The complement of 55% is 45%
 The complement of 5% is 95%.

Cleaves/Hobbs
How to find the net price
1. Find the complement: subtract the single trade
discount from 100%.
2. Multiply the list price by the complement of the
single trade discount.
Example:
Find the net price of a coffee maker that lists
for $20 and has a trade discount rate of 20%.
80% is the complement of 20%
NP = $20 x 0.80 = $16

Cleaves/Hobbs
Try these examples
 Find the net price of a set of golf clubs that
lists for $1,500 and has a trade discount of
15%.
 $1275
 Find the net price of a bicycle that lists for
 $71.40

Cleaves/Hobbs
8.2 Trade Discount Series
 Find the net price, applying a trade
discount and using the net decimal
equivalent.
 Find the trade discount, applying a
trade discount series and using the
single discount equivalent.

Cleaves/Hobbs
Trade discount series
 Trade discount series or chain discount:
additional discounts that are deducted one after
another from the list price.
 Reasons to use discount series include:
 To encourage volume purchases
 To promote special or seasonal items
 To entice a new client

Cleaves/Hobbs
Trade discount series step by step
 An item lists for $400 and has a discount of
20%. $400 x 0.2 = $80; $400 - $80 = $320
 An additional discount of 10% is taken on the
previous price.
$320 x 0.1 = $32; $320 - $32 = $288
 An additional discount of 5% is taken on the
previous price.
$288 x 0.05 = $14.40; $288 - $14.40 = $273.60
 $273.60 is the final price

Cleaves/Hobbs
Can you add the discounts
together and apply it as one?
 If the item has three discounts of 20%, 10%
and 5%, can you add them together and
apply a 35% discount?
 No, because each time you apply the
additional discount, the base becomes
smaller. Directly applying a 35% discount
would result in a final price of $260.
$260 ≠ $273.60

Cleaves/Hobbs
The net decimal equivalent
 To find the net decimal equivalent of a
trade discount series:
1. Find the net decimal equivalent: multiply
the decimal form of the complement of
each trade discount rate in a series.
2. Multiply the list price by the net decimal
equivalent.

Cleaves/Hobbs
 Find the net price of an order with a list price of
$800 and a trade discount series of 20/10/5.
 Find the complement of each of the trade
discount rates.
 They are 0.80, 0.90 and 0.95.
Multiply them together.
 The net decimal equivalent is 0.684
 Apply the net decimal equivalent to the list
price.
 NP = 0.684 x $800 = $547.20

Cleaves/Hobbs
Try these examples
 A tool set lists for $325 and has a trade
discount series of 20/10/10. Find the net
price.
 $210.60
 A dress shirt lists for $125 and has a trade
discount series of 15/10/7.5. Find the net
price.
 $88.45

Cleaves/Hobbs
8.2.2 Find the Trade Discount
To find the trade discount by applying a trade
discount series and using the single discount
equivalent:
1. Find the single discount equivalent by
subtracting the net decimal equivalent from “1.”
2. Multiply the list price by the single discount
equivalent.
TD = single discount equivalent x list price

Cleaves/Hobbs
Key Terms
 Single discount equivalent: the
complement of the net decimal equivalent.
It is the decimal equivalent of a single
discount rate that is equal to the series of
discount rates.
 Total amount of a series of discounts =
single discount equivalent x list price
 Net amount you pay = net decimal
equivalent x list price

Cleaves/Hobbs
 Use the single discount equivalent to
calculate the trade discount on a $3,200
lawn tractor with a discount series of
30/20/10.
 Find the net decimal equivalent by
multiplying the complements of each
discount rate. 0.70 x 0.80 x 0.90 = 0.504
 To find the single discount equivalent,
subtract the net decimal equivalent from “1.”

Cleaves/Hobbs
 Subtract the net decimal equivalent (0.504) from
“1” to find the single discount equivalent.
 The result is 0.496 (or 49.6%).
 The single discount equivalent is 0.496; apply it to
the price of $3,200.
 TD = $3,200 x 0.496 = $1,587.20
 The trade discount on the tractor is $1,587.20.
That is the amount that you do not pay.
Look at this example (continued)

CH08_PPT trade discounts (1).ppt

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