Question

A trader buys a set of ornaments that is listed at RM5,000 with trade discounts of 20% and 10%.
If he sells the set at a net profit of 30% based on cost and the operating expenses are 5% on cost,
find the:
i. gross profit (8 marks)
ii. selling price (4 marks)
iii. breakeven price (4 marks)
iv. maximum markdown that could be given without incurring any loss. (4 marks)

Answer 1

i. Gross Profit:
First, calculate the cost price after trade discounts:
Trade discount 1 = 20% of RM5,000 = 0.2 x RM5,000 = RM1,000
Cost after trade discount 1 = RM5,000 - RM1,000 = RM4,000

Trade discount 2 = 10% of RM4,000 = 0.1 x RM4,000 = RM400
Cost after trade discount 2 = RM4,000 - RM400 = RM3,600

Operating expenses = 5% of RM3,600 = 0.05 x RM3,600 = RM180

Total cost = Cost after trade discounts + Operating expenses = RM3,600 + RM180 = RM3,780

Net profit = 30% of RM3,780 = 0.3 x RM3,780 = RM1,134

Gross Profit = Selling Price - Total Cost = RM1,134

ii. Selling Price:
Selling Price = Total Cost + Net Profit = RM3,780 + RM1,134 = RM4,914

iii. Breakeven Price:
Breakeven Price is the selling price at which the trader neither makes a profit nor incurs a loss.
Breakeven Price = Total Cost / (1 - Operating Expenses) = RM3,780 / (1 - 0.05) = RM3,780 / 0.95 = RM3,978.95

iv. Maximum Markdown:
Maximum Markdown is the maximum reduction that can be made on the selling price without incurring any loss.
Let the maximum markdown be x.
Selling Price after Markdown = Selling Price - x
Cost Price remains the same.

For no loss:
Selling Price after Markdown = Total Cost

Selling Price - x = Total Cost
x = Selling Price - Total Cost
x = RM4,914 - RM3,780
x = RM1,134

Therefore, the maximum markdown that could be given without incurring any loss is RM1,134.