## Computing MRP for a typical retail chain

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. A typical Retail Store in India

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.
Stage 1: The cost to the manufacturer is INR 100, who keeps a margin of 25% and sells it to stockist. The selling price before GST for the manufacturer will be INR 125 and after levying a GST of 18% the selling price after GST will be INR 148. INR 148 is what the stockist will pay the manufacturer. Stage 2: The profit margin of the stockist is 5% and it would be computed at the cost before tax i.e. on INR 125 and not INR 148. Thus, 5% of INR 125 i.e. INR 6 is the final margin for the stockist. The price of stockist would be INR 131 before tax. GST of INR 24 @ 18% is to be paid on the same. While paying the Output GST of INR 24 on INR 131, the stockist would get a credit of INR 23 paid to the manufacturer as Input GST. The stockist would be ideally required to pay only INR 1 to the government treasury as GST. Thus, GST is not included as the cost for the purpose of calculation of margins. The same logic shall apply at each stage of the distribution Stage 3: The cost on which margin is to be computed for the distributor would be INR 131 (pre-tax amount). Thus, 8% on INR 131 would be INR 11 and the price before tax is INR 142. Now the distributor shall levy a GST of 18% on INR 142 and pay the same to the government. As discussed above, the distributor would get the credit of GST paid to the stockist (INR 24) while paying GST on the goods sold and hence pay a net amount of INR 2 to the government. Stage 4: The same process as above shall apply to the retailer.

##  • 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
Assumptions made while computing the margins
• 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.