How to decide mark-up for taxable items?
Post 1 of 2
This query is on determining the appropriate level of mark-up for a taxable item.
For the past 10 years, company X has been a distributor for item A that it imports at CIF cost of $1 per item. Company X then sells the items at $1.30 per item, i.e. at a mark-up of 30% over the CIF cost - company X is comfortable with a profit of $0.30 per item.
[Let's not start arguing "Why does company X not consider handling cost, warehousing cost, etc. when calculating its mark-up". After all, the mark-up of 30% is just for discussion's sake, readers who find 30% "too low" can make it 100%, 500% or whatever level that they like :-) ]
The government has just announced that with effect from next month, item A will be imposed with a duty rate set at 50% of CIF cost. Therefore, starting next month, the cost of item A to company X after payment of tax will become $1.50 [CIF $1 + duty $0.50].
Question: How should company X mark-up on item A. There are two methods:
(i) Maintain a mark-up of 30% of new cost and sell at $1.95 [$1.50 + 30%]. Profit becomes $0.45 per item [$1.95 - $1.50].
(ii) Maintain a profit of $0.30 per item and at $1.80 [$1.50 + $0.30]. Mark-up becomes only 20% [$0.30 / $1.50]. But company X does not mind a lower mark-up because it is comfortable with the absolute profit of $0.30 per item.
Normally, which method is adopted by companies in such scenarios? I know there is no "fixed" method, I am just trying to find out the more commonly adopted method.
By the way, some readers may argue "as company X incurs opportunity cost for paying the tax up-front, it should therefore recover this opportunity cost by adopting method (i)". Let's keep thing simple by assuming that opportunity cost is minimal because the items always sell very fast after importation and hence opportunity cost is not an issue to company X :-).
For the past 10 years, company X has been a distributor for item A that it imports at CIF cost of $1 per item. Company X then sells the items at $1.30 per item, i.e. at a mark-up of 30% over the CIF cost - company X is comfortable with a profit of $0.30 per item.
[Let's not start arguing "Why does company X not consider handling cost, warehousing cost, etc. when calculating its mark-up". After all, the mark-up of 30% is just for discussion's sake, readers who find 30% "too low" can make it 100%, 500% or whatever level that they like :-) ]
The government has just announced that with effect from next month, item A will be imposed with a duty rate set at 50% of CIF cost. Therefore, starting next month, the cost of item A to company X after payment of tax will become $1.50 [CIF $1 + duty $0.50].
Question: How should company X mark-up on item A. There are two methods:
(i) Maintain a mark-up of 30% of new cost and sell at $1.95 [$1.50 + 30%]. Profit becomes $0.45 per item [$1.95 - $1.50].
(ii) Maintain a profit of $0.30 per item and at $1.80 [$1.50 + $0.30]. Mark-up becomes only 20% [$0.30 / $1.50]. But company X does not mind a lower mark-up because it is comfortable with the absolute profit of $0.30 per item.
Normally, which method is adopted by companies in such scenarios? I know there is no "fixed" method, I am just trying to find out the more commonly adopted method.
By the way, some readers may argue "as company X incurs opportunity cost for paying the tax up-front, it should therefore recover this opportunity cost by adopting method (i)". Let's keep thing simple by assuming that opportunity cost is minimal because the items always sell very fast after importation and hence opportunity cost is not an issue to company X :-).
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07 Oct 2007 18:43
Post 2 of 2
Replying To [kai1]:If I was company X, I would go with option ii.
It is fair, and I would still make the same profit as before, and also give the customer the opportunity to get the product cheaper than the opposition.
11 Oct 2007 06:57
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