One method that Tina Powell uses to determine her selling price is called target pricing. It begins with Tina estimating the price that the ultimate consumer would pay for her book at the...
One method that Tina Powell uses to determine her selling price is called target pricing. It begins with Tina estimating the price that the ultimate consumer would pay for her book at the bookstore. She does this by checking the prices of competitors’ children’s books at the bookstores and determines a reasonable price for her books, based on the market. She then works backward through the markups taken by the retailer and distributor to determine if the price she can charge the distributor for the book will cover her costs and provide a fair profit. Tina’s children’s books sell for $9.95 at the retail level.
Book retailers usually ask for a 40% markup on the retail selling price, while Tina’s distributor, Red Tuque Books, receives 30% on its selling price to bookstores. Work backwards through the markups to determine the selling price that Tina charges the distributor.
Retail price = $9.95
Retailers markup =
Retailers cost =
Distributor selling price =
Distributor markup =
Tina’s selling price to Distributor =
In this question, I assume that Tina Powell is an author who is trying to determine how much to charge the distributor of her books. She knows that the ultimate price of her books to the retail customer will be $9.95.
Her first step is to try to determine how much the retail store will pay the distributor for each book. The retailers want to sell the book for $9.95 and they want that price to be a 40% markup from the price they paid for the book. We can figure out the price they paid through simple algebra.
Let the price they paid be x. They are going to charge x plus 40% of x (the markup) for the book. We know that that total price will be $9.95. Mathematically, we set the equation up as
x + .4x = 9.95
1.4x = 9.95 – now we divide both sides by 1.4 and we get
X = 7.11
This tells us that the distributor will sell each book to the retailer for $7.11.
Now we need to figure out how much the distributor pays Powell. We know the distributor charges $7.11 and we know they mark the books up 30% above what they paid for the books. We set up our equation just like we did before:
x + .3x = 7.11
1.3x = 7.11 – now we divide both sides by 1.3 and we get
X = 5.47
This tells us that the distributor paid $5.47 for each book.
Our answers, then, are :
Retailers markup = 40%
Retailers cost = $7.11
Distributor selling price = $7.11
Distributor markup = 30%
Tina’s selling price to Distributor = $5.47