So I've been thinking about how to mark up goods sold by my company. Should we sell at purchase cost (plus markup) or replacement cost (plus markup)? This question kind of involves the tax-which-must-not-be-named insofar as the cost of the goods in question have recently undergone an approx 200% price hike. I knew something like this was coming, and have been bugging my supplier for advance notice of the increase, but they wouldn't say. Now, all of a sudden the value of my "stock" has risen and I've had to absorb the cost. Does this make any sense? I'm not sure.
I'm talking about refigerant (R134a). We buy it approx 30kg at a time and it takes about 6 weeks to sell that amount. This means the value of our "stock on hand" has risen by about $850 and we have to wear the cost. I would have liked to have sold our previous stock at the replacement cost, but now it's too late. I know it's not a huge amount in the big scheme of things, but it annoys me that our supplier wouldn't even consider mentioning a price rise for fear of prosecution. So is selling your goods at replacement cost a legitimate way of doing business? Is there a documented economic therory behind the subject which I can research? Thanks for your interest.
You really should put your prices up, even if you bought it at the cheaper rate, for the sake of your cash flow.
Don't get me wrong, our selling price went up pro-rata as soon as we learnt the new purchase price, but the point is we've had to sink another few hundred dollars into our stock. Money which has had to come, as you rightly point out, from our cash flow.
