Question

For a shipment of towels, the buyer plans the initial markup to be 54%. The transportation of the towels was 2.3%. Toward the end of the month, the operating expenses are estimated to be 34.52%. Loss or shrinkage (shortage) is usually about 2.50% for the department. No employee discounts are taken during the month. Markdowns were planned to be 12.50%, but the merchandise did not sell well and the buyer would like to take additional markdowns.    

What happens to profit if markdowns become 20% and what does this mean?

What should the buyer/merchandiser do?

Answer 1

Please find the chart below for easy calculation understanding. The cost is assumed to be 100 for start of calculation

Particulars	Cost	Option 1	Option 2
Original cost	100.00
Transportation	2.30
Operating Expenses	34.52
Shrinkage Loss	2.50
Total Cost	139.32
Original cost		100.00	100.00
Initial Markup 54%		54.00	54.00
Planned MRP after mark up		154.00	154.00
Markdowns to sell product		12.50	20.00
Actual Selling Price		141.50	134.00
Profit (Actual SP - Cost)		2.18	-5.32

The merchandiser cannot markdown to 20% since it will result in loss. If the merchandiser is not able to sell at the planned levels with a markdowns of 12.5%, he should not consider taking up this shipment, since it will result in loss if markdowns are made to the extent of 20%.