Computing the final selling price (MRP) for the consumer after providing for margins at each level of distribution and the impact of GST can be a strenuous and complicated exercise for many businesses. There are two reasons resulting in this complexity:
- Products travel through an entire supply chain of stockist, distributors, wholesalers and retailers before they are finally sold to the consumer and margins are to be computed at each point of the supply chain.
- Along with margin calculation, there is an additional GST impact which is to be considered at each stage of the supply chain.
We have explained the method of calculating the MRP for each level distribution when you either know the cost price and need to arrive at the MRP OR you know the MRP and want to reverse work the margins across the supply chain.
Forward Working of Margins
- In table 1 above, we have computed the selling price for the retailer starting with the basic price/cost to the manufacturer, thus this table is termed as “Forward Working”.
- Margins at each stage are computed on the price before tax and not on the selling price as they would get GST credit for the GST paid on the earlier level.
Backward Working of Margins
- In table 2 below, we have computed the cost price to the manufacturer by taking the final MRP as the starting point.
- There are many cases where one knows the final MRP to charge to consumers based on a customer survey and then would want to compute the net selling price for the manufacturer after accounting for the margins of the supply chain.
- For this purpose, we have done a reverse calculation; the basic concept of computing margin on the cost pre-tax remains the same.
How to use the excel
- We have attached a predefined excel sheet with the above 2 tables. This sheet shall help you to compute your margins and selling price at each stage as the sheet has the formula and the workings
- You have to feed in your numbers in the columns highlighted in orange.
- Where you are doing a forward calculation, please put your actual cost price as the starting price in table 1.
- Where you are doing a backward calculation, please put your selling price as the starting amount in Table 2
- In this example, we have assumed that there are 4 levels of distribution; these may be more or less depending upon your business.
- Please note that we have used 18% GST rate for the purpose of this example, the GST rate may vary depending upon the nature of the transaction.
- As mentioned above, we have assumed that the GST credit would be available at each stage of the distribution. Where it is not so, the base cost to compute margins will not be pre-tax but post-tax.
- In case of any queries please contact us at email@example.com