Question

A buyer for a chain of garden stores is deciding on prices for the chain’s extensive line of potted plants. Management has indicated that the target gross margin for these items should be 40 percent. Last year, markdown reductions amounted to 17 percent of the total dollar sales revenue received from potted plants.

1. If the buyer assumes this year’s markdown reductions as a percentage of intended revenue will be similar to last year’s, what initial gross margin should she apply to make the maintained gross margin match management’s target gross margin for these items?
2. Use your answer to Part (a) to suggest an initial price for each of the following items:

Orchids, cost: $8.75/unit

Chrysanthemums, cost: $3.50/uni

Answer 1

Let the revenue be "X" per unit, This is the price post markdown.

X - Cost = 40% of X

X - 8.75 = 0.40X

0.60 X = 8.75

X = $14.583

We know that X will be reduced by 17%. Let initial price to be set before markdown be Y.

Then, Y - 14.583 / Y = 0.17

0.83 Y = 14.583

Y = $ 17.571. So initial price for Orchids should be $17.571.

Similarly, for Chrysanthemums

Xc - 3.50 = 0.40Xc

Xc = $5.833

Initial price =Yc

Yc -5.833/Yc = 0.17

Yc = $7.03