Case Studies 8-3 and 9-1 answers

Case Studies 8-3 and 9-1 answers

The Artist’s Palette sells high-end art supplies to the art students at three regional art and design

schools in Philadelphia, Washington, D.C., and Baltimore. It carries paints, brushes, drawing pads,

frames, charcoal, pastels, and other supplies used in a variety of artistic media. Because its clien-

tele is very discriminating, The Artist’s Palette tends to carry only the top lines in its inventory and

it is known for having the best selection on hand. It is rare that an item is out of stock. Artists can

visit the store, purchase from The Artist’s Palette catalog, or from the secure web site.

1. The Artist’s Palette purchases its inventory from a number of suppliers and each supplier of-

fers different purchasing discounts. The manager of The Artist’s Palette, Marty Parma, is

currently comparing two offers for purchasing modeling clay and supplies. The first com-

pany offers a chain discount of 20/10/5, and the second company offers a chain discount of

18/12/7 as long as the total purchases are $300 or more. Assuming Parma purchases $300

worth of supplies, what is the net price from supplier 1? From supplier 2? From which sup-

plier would you recommend Parma purchase her modeling clay and supplies?

2. What is the net decimal equivalent for supplier 1? For supplier 2?

3. What is the trade discount from supplier 1? From supplier 2?

4. The Artist’s Palette recognizes that students may purchase supplies at the beginning of the term to cover all of their art class needs. Because this could represent a fairly substantial outlay, The Artist’s Palette offers discounts to those students who pay sooner than required.Assume that if students buy more than $250 of art supplies in one visit, they may put it on a student account with terms of 2/10, n/30. If a student purchases $250 of supplies on September 16, what amount is due by September 26? How much would the student save by pay-ing early?

5. Assume that if students buy more than $250 of art supplies in one visit, they may put the charge on a student account with terms of 2/10 EOM. If a student makes the purchase on September 16, on what day does the 2% discount expire? If the purchase is made on September 26, on what day does the 2% discount expire? If you were an art student, which method would you prefer: 2/10, n/30, or 2/10 EOM


Karen is an acupuncturist with a busy practice. In addition to acupuncture services, Karen sells teas,

herbal supplements, and rice-filled heating pads. Because Karen’s primary income is from acupuncture,

she feels that she is providing the other items simply to fill a need and not as an important source of

profits. As a matter of fact, the rice-filled heating pads are made by a patient who receives acupuncture

for them instead of paying cash. The rice-filled pads cost Karen $5.00, $8.00, and $12.00, respectively,

for small, medium, and large sizes. The ginger tea, relaxing tea, cold & flu tea, and detox tea cost her

$2.59 per box plus $5.00 shipping and handling for 24 boxes. Karen uses a cost plus markup method,

whereby she adds the same set amount to each box of tea. She figures that each box costs $2.59 plus

$0.21 shipping and handling, which totals $2.80, then she adds $0.70 profit to each box and sells it for

$3.50. Do you think this is a good pricing strategy? How would it compare to marking up by a percent-

age of the cost?

1. What is the markup percentage for a box of ginger tea?

2. If the rice-filled heating pads sell for $7.00, $10.00, and $15.00 for small, medium, and large, respectively, what is the markup percentage on each one?

3. Karen wants to compare using the cost plus method to the percentage markup method. If she sells 2 small rice pads, 4 medium rice pads, 2 large rice pads, and 20 boxes of $3.50 tea in a month, how much profit does she accumulate? What markup percentage based on cost would she have to use to make the same amount of profit on this month’s sales?

4. What prices should Karen charge (using the markup percentage) to obtain the same amount of profit as she did with the cost plus method? Do not include shipping.