Chapter 8.I, Problem 25RE

Solve the following word problems. Round dollars to the nearest cent and percents to the nearest tenth of a percent.

In department and specialty store retailing, a common markup strategy is to double the cost of an item to arrive at the selling price. This strategy is known as keystoning the markup and is widely used in apparel, cosmetics, fashion accessories, shoes, and other categories of merchandise.

The reasoning for the high amount of markup is that these stores have particularly high operating expenses. In addition, they have a continuing need to update fixtures and remodel stores to attract customers.

You are the buyer in the women’s shoe department of the Roma Grande Department Store. You normally keystone your markups on certain shoes and handbags. This amount of markup allows you enough gross margin so that you can lower prices when “sales” occur and still have a profitable department.

a. If you are looking for a line of handbags that will retail for $120, what is the most you can pay for the bags?

b. At a women’s wear trade show, you find a line of handbags that you like with a suggested retail price of $130. The vendor has offered you trade discounts of 30/20/5. Will this series of trade discounts allow you to keystone the handbags?

c. (Challenge) The vendor tells you that the first two discounts. $30\%$ and $20\%$ are fixed, but the $5\%$ is negotiable. What trade discount, rounded to a whole percent, should you request in order to keystone the markup?