How to Calculate a Negative Margin | 9 Exercises

Application: Modern Winegrowers

States :
Les Vignerons Moderne, a small family-run organic wine company, recently faced a difficult season due to poor weather conditions. The cost of producing a bottle is €10, but due to competitiveness and the need to maintain market share, they were forced to sell each bottle for just €8.

Work to do :

1. Calculate the unit margin for each bottle of wine sold.
2. Determine the margin rate and explain whether it is positive or negative.
3. What is the markup rate for this product?
4. If Modern Winegrowers want to achieve a positive margin, at what minimum price should they sell their bottle?
5. Discuss the strategic reasons that might cause the company to sell at a temporary loss.

Proposed correction:

1. The unit margin is calculated by subtracting the selling price excluding tax (PV excluding tax) from the purchasing price excluding tax (PA excluding tax).
   Unit margin = PV HT – PA HT = €8 – €10 = -€2.
   The unit margin is negative by €2, the company is selling at a loss.

2. The margin rate is calculated as follows:
   Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100
   Margin rate = ((8 – 10) ÷ 10) x 100 = (-2 ÷ 10) x 100 = -20%.
   The margin rate is -20%, confirming that the sale is made at a loss.

3. The markup rate is calculated as follows:

Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100
Markup rate = ((8 – 10) ÷ 8) x 100 = (-2 ÷ 8) x 100 = -25%.
The mark-up rate is -25%, indicating a net loss on net turnover.

4. To achieve a positive margin, the company must sell above the purchase cost.
   Desired margin percentage = 0, therefore PV excluding tax = PA excluding tax = €10.
   The company must therefore sell each bottle above €10, for example, €11 for a positive margin.

5. The company might decide to sell at a temporary loss for many strategic reasons, such as liquidating inventory to generate quick cash flow, increasing market share in tough economic times, or building long-term customer loyalty. However, these decisions must be accompanied by plans to return to profitability.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100

Application: Tech Innovators Inc.

States :
Tech Innovators Inc. recently launched a new smartphone model in order to conquer a very competitive market. The manufacturing cost for each smartphone is €450, but in order to be aggressive in the market, they decided to sell it at only €400.

Work to do :

1. Calculate the unit margin for each smartphone sold.
2. Estimate the margin rate of Tech Innovators Inc. and interpret the result.
3. What will be the markup rate for this sale?
4. Identify the minimum selling price excluding tax to avoid a negative margin.
5. Analyze the risks associated with negative margins for an extended period in the technology sector.

Proposed correction:

1. The unit margin is calculated as the difference between the selling price and the purchase price.
   Unit margin = PV HT – PA HT = €400 – €450 = -€50.
   Each smartphone is sold at a loss of €50.

2. The margin rate is calculated as follows:
   Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100
   Margin rate = ((400 – 450) ÷ 450) x 100 = (-50 ÷ 450) x 100 = -11,11%.
   The margin rate indicates a loss of 11,11% on the initial cost.

3. The markup rate is calculated as follows:

Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100
Markup rate = ((400 – 450) ÷ 400) x 100 = (-50 ÷ 400) x 100 = -12,5%.
This rate indicates that the company records a loss of 12,5% ​​on each sale.

4. To achieve at least zero profit, the selling price must cover the cost of manufacturing.
   PV HT must be? PA HT therefore PV HT = €450.
   The selling price must therefore be higher than €450 to avoid negative margins.

5. Prolonging sales with negative margins in the technology sector can lead to substantial capital erosion, possible insolvency, or even difficulties in innovation and new product development. This could affect the credibility and sustainability of the company in a highly technological market.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100

Application: The Chic Hat

States :
Le Chapeau Chic, a trendy brand in the fashion sector, has launched its new autumn-winter collection. A specific hat model has a production cost of €30, but to attract crowds during private sales, the company has decided to market it at €25.

Work to do :

1. Determine the unit margin for each hat sold.
2. Calculate the margin rate for this transaction.
3. What are the markup rates for this item?
4. What minimum selling price could guarantee a move to a positive margin for this hat?
5. Discuss the strategic implications of selling at negative margin in the fashion industry.

Proposed correction:

1. The unit margin of a product is simple to calculate using the formula:
   Unit margin = PV HT – PA HT = €25 – €30 = -€5.
   This hat is therefore sold with a loss of €5 per unit.

2. The calculation of the margin rate is carried out as follows:
   Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100
   Margin rate = ((25 – 30) ÷ 30) x 100 = (-5 ÷ 30) x 100 = -16,67%.
   This margin rate reflects a loss of 16,67% compared to the purchase price.

3. The markup rate is calculated as follows:

Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100
Markup rate = ((25 – 30) ÷ 25) x 100 = (-5 ÷ 25) x 100 = -20%.
The mark-up rate indicates the importance of the loss compared to the selling price excluding tax.

4. To achieve a positive margin, the selling price must be higher than the cost of production.
   By having to at least equal the cost: PV excluding tax = €30.
   The selling price should at least be higher than €30 to obtain a positive margin.

5. In the fashion industry, selling at a loss can be a strategic choice to penetrate a market, liquidate end-of-season inventory, or build brand awareness. However, this choice involves absorbing financial losses temporarily, in the hope of increased future profits.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100

Application: Urban Ecoservices

States :
Écoservices Urbains, which specializes in the management of recyclable waste in urban areas, has had to deal with increased costs following a legislative change. The cost of training and processing for each batch is €75, but the company has set the service price at €70 to remain competitive.

Work to do :

1. Calculate the unit margin per lot processed.
2. Determine the margin rate and analyze its meaning.
3. Identify the markup rate.
4. Calculate the price threshold needed to restore a neutral margin.
5. Discuss the long-term issues associated with below-cost pricing in the environmental sector.

Proposed correction:

1. The unit margin is accessible by the following formula:
   Unit margin = PV HT – PA HT = €70 – €75 = -€5.
   Each lot is processed with a loss of €5.

2. The margin rate is determined as follows:
   Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100
   Margin rate = ((70 – 75) ÷ 75) x 100 = (-5 ÷ 75) x 100 = -6,67%.
   This highlights a loss margin of 6,67% on the processing cost.

3. The calculation of the markup rate is carried out as follows:

Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100
Markup rate = ((70 – 75) ÷ 70) x 100 = (-5 ÷ 70) x 100 = -7,14%.
The mark-up rate expresses a significant loss compared to the net turnover.

4. To avoid a negative margin, the price must at least cover costs.
   This means that the minimum selling price excluding VAT must be at least €75.
   A price adjustment to €75 or more will avoid negative margins.

5. In the field of environmental management, practicing prices below costs can deteriorate the financial balance sheet and slow down investment in green technologies. By increasing losses, this could compromise the sustainability of the services offered and their excellence in the longer term.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100

Application: BioRegal

States :
BioRegal, a company that distributes organic food products, has just launched a range of local products. Due to unforeseen logistics costs, the purchase cost of each basket has risen to €50, while the sale price is set at €45 to retain customers.

Work to do :

1. Estimate the unit margin for each food basket.
2. Explain the margin percentage associated with this sale.
3. Determine the markup rate for this business transaction.
4. What minimum price should be set to eliminate the negative margin?
5. What could be the challenges of a sustainable policy of sales at a loss for an organic distributor such as BioRegal?

Proposed correction:

1. The unit margin is defined by the calculation:
   Unit margin = PV HT – PA HT = €45 – €50 = -€5.
   Each food basket generates a loss of €5.

2. The margin rate is expressed by:
   Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100
   Margin rate = ((45 – 50) ÷ 50) x 100 = (-5 ÷ 50) x 100 = -10%.
   The negative margin corresponds to a loss of 10%, which is significant.

3. The markup rate should be calculated as follows:

Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100
Markup rate = ((45 – 50) ÷ 45) x 100 = (-5 ÷ 45) x 100 = -11,11%.
The mark-up rate reveals a significant relative loss compared to net turnover.

4. To achieve a zero or positive margin, the selling price must be adjusted.
   The minimum sale price must be aligned with the purchase cost, i.e. €50.
   Therefore, the PV excluding tax should be greater than or equal to €50 to avoid selling at a loss.

5. For an organic distributor like BioRegal, maintaining prices below cost can harm profitability and restrict the improvement of direct purchasing capabilities from producers. This situation risks reducing resources for investment, future growth and employment stability.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100

Application: AutoParts Passion

States :
AutoParts Passion, an online supplier of car accessories, has decided to sell some items from old stock on sale. The cost of these items is €100, but they are now on sale for just €85.

Work to do :

1. Calculate the unit margin for each item sold at the old price.
2. Evaluate the margin rate for this promotional operation.
3. Identify the resulting markup rate.
4. What would be the minimum selling price guaranteeing a neutral margin?
5. Discuss the potential benefits and challenges of moving inventory at a loss for AutoParts Passion.

Proposed correction:

1. The unit margin is determined by:
   Unit margin = PV HT – PA HT = €85 – €100 = -€15.
   Per item, this generates a loss of €15.

2. The calculation of the margin rate is carried out as follows:
   Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100
   Margin rate = ((85 – 100) ÷ 100) x 100 = (-15 ÷ 100) x 100 = -15%.
   This operation causes a loss of 15%.

3. The markup rate is calculated as follows:

Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100
Markup rate = ((85 – 100) ÷ 85) x 100 = (-15 ÷ 85) x 100 = -17,65%.
The mark-up rate reveals a significant loss of 17,65% compared to net sales.

4. To make the operation profitable, the PV excluding tax must be at least equal to €100.
   An adjusted selling price of €100 would eliminate any negative margin.
   The minimum sale price should be €100 to ensure a neutral margin.

5. Selling at a loss allows AutoParts Passion to free up inventory space and may attract customers, but it risks lowering its overall profit margin. If loss-making occurs frequently, the viability of the business could eventually be called into question.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100

Application: ConnectSofas

States :
ConnectSofas is a startup that innovates in connected design furniture. Recently, they put on sale a smart sofa at a price of €600, although the manufacturing cost turned out to be €650 due to the increase in raw materials.

Work to do :

1. Calculate the unit margin for each of these new sofas.
2. Set the margin rate from the ConnectSofas financial dashboard.
3. Calculate the markup rate on this particular sale.
4. What would be the minimum price to set to obtain a positive margin?
5. Analyze the implications of maintaining a long-term below-cost pricing strategy in the smart furniture industry for ConnectSofas.

Proposed correction:

1. The unit margin is calculated by:
   Unit margin = PV HT – PA HT = €600 – €650 = -€50.
   Each sofa sold represents a loss of €50.

2. The margin rate is obtained by the following calculation:
   Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100
   Margin rate = ((600 – 650) ÷ 650) x 100 = (-50 ÷ 650) x 100 = -7,69%.
   The transaction shows a loss margin of 7,69%.

3. The markup rate is calculated as follows:

Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100
Markup rate = ((600 – 650) ÷ 600) x 100 = (-50 ÷ 600) x 100 = -8,33%.
The mark-up rate reflects a loss of 8,33% compared to net sales.

4. A minimum sale price of €650 would neutralise the necessary negative margin.
   This would avoid any sales being made at a loss.
   Therefore, the minimum selling price required to achieve a positive margin must be equal to or greater than €650.

5. Pricing below cost may help ConnectSofas differentiate itself and attract initial customers in the highly competitive smart furniture industry. However, in the long term, this strategy will need to be reevaluated, as it may lead to sustained capital erosion and compromise the company's ability to innovate.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100

Application: HealthyBites

States :
HealthyBites, a young company specializing in healthy snacks, has recently launched a quinoa energy bar. The production cost per unit is €2, but, to make itself known, it is offered at €1,50 on the market.

Work to do :

1. Determine the unit margin for each bar sold.
2. Calculate the margin rate and analyze the financial implications of this pricing choice.
3. Describe the markup rate for this product line.
4. At what minimum selling price does the negative margin become neutral?
5. Consider the possible consequences on brand image and finances if this price-fixing practice continues.

Proposed correction:

1. The unit margin is calculated by:
   Unit margin = PV HT – PA HT = €1,50 – €2 = -€0,50.
   HealthyBites therefore suffers a loss of €0,50 per bar sold.

2. The margin rate is assessed via:
   Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100
   Margin rate = ((1,50 – 2) ÷ 2) x 100 = (-0,50 ÷ 2) x 100 = -25%.
   This rate signals a loss of 25% compared to the cost of production.

3. The markup rate is determined in this way:

Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100
Markup rate = ((1,50 – 2) ÷ 1,50) x 100 = (-0,50 ÷ 1,50) x 100 = -33,33%.
Selling at this price represents a significant sacrifice in net sales.

4. For the neutralization of the negative margin, the price required is €2.
   Establishing a minimum sale price of €2 is essential.
   This price threshold should prevent sales below production costs.

5. Although selling at a loss may temporarily position HealthyBites in the market and increase awareness of its innovative products, this practice could negatively affect profitability and slow reinvestment in research and development over the long term.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100

Application: EcoloLighting

States :
EcoloLighting, a company dedicated to energy-efficient LED lighting, recently launched a new series of lamps. Each costs €12 to manufacture, however, to penetrate a saturated market, they are sold at €10.

Work to do :

1. Calculate the unit margin for each lamp sold.
2. Deduct the margin rate resulting from this aggressive pricing policy.
3. Identify the markup rate for this new product.
4. What tariff threshold would eliminate any negative margin on the sale of these lamps?
5. What could be the strategic approach to managing negative margins in the context of energy-efficient LED products?

Proposed correction:

1. The unit margin is obtained as follows:
   Unit margin = PV HT – PA HT = €10 – €12 = -€2.
   Therefore, each lamp sold results in a loss of €2.

2. The margin rate is calculated as follows:
   Margin rate = ((PV excluding tax – PA excluding tax) ÷ PA excluding tax) x 100
   Margin rate = ((10 – 12) ÷ 12) x 100 = (-2 ÷ 12) x 100 = -16,67%.
   A loss of 16,67% is recorded with respect to the production cost.

3. The markup rate is stated as follows:

Brand rate = ((PV excluding tax – PA excluding tax) ÷ PV excluding tax) x 100
Markup rate = ((10 – 12) ÷ 10) x 100 = (-2 ÷ 10) x 100 = -20%.
This implies a significant reduction in potential revenue.

4. In order to avoid negative margins, the product must be sold at a minimum price of €12.
   A sufficient price adjustment to €12 allows the absence of negative margins.
   Pricing at or above €12 is necessary for profitability.

5. In a competitive energy-efficient lighting market, selling at a loss could increase brand penetration and recognition of EcoloLighting products. However, this should remain a short-term strategy, with a focus on innovation and margin improvement to ensure sustainable success.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100