COMMISSION AND TRADE

DISCOUNT

Course Code and Title: ISD 151 Business Mathematics

Lecturer: Abdul Samed Muntaka
 OUTLINE
 Definition of Commission
 Essence of Commission and Discount in Business

 Types of Commission

 Commercial Discount
 Trade Discount
 Retail Discount

 Returned Merchandise and Freight Charges

COMMISSION
 DEFINITION OF COMMISSION

 A commission is an amount paid to a sales officer or an agent

for performing a service or business transaction on behalf of an
individual or organisation.

 It is usually calculated as a proportion/percentage of total sales

or the total amount collected/earned from the transaction.

 Commission = Sales (Amount involved) × Rate of

Commission
 DEFINITION OF COMMISSION CONT’D
 Some organisations require their sales staff to make a certain level
of sales before they earn a commission or their basic salary. This
level of sales the sales officer must make is referred to as a Quota

 A Quota is a level of sale (or an amount) that an agent or sales

officer must meet to earn a commission or their basic salary.

 Where a quota exist, commission is calculated on a commission

amount.
 Commission = Commission Amount × Rate of Commission

 Commission Amount = Sales – Quota

NB: Commission amount is the amount on which commission is calculated or paid
 WORKED EXAMPLE 1
 A sales officer earns a commission of 5.5% on total sales. If in a
given month the officer received an amount of ¢755.00 as
commission, what was the level of sales.

Solution:
Commission (C) = Sales (S) × rate of commission (R)
¢755 = S × 0.055 (i.e. 5.5% as a decimal)
¢755/0.055 = S
¢13,727.27 = S
The level of sales for that month is ¢13,727.27

NB. Please always remember to answer the question after you find the answer.
 WORKED EXAMPLE 2
 Issah, a licensed broker received ¢2,500 as commission for
selling a house for ¢58,750. What was his rate of commission?

Solution:
C=S×R
C = ¢2,500 S = ¢58,750 R=?
¢2,500 = ¢58,750 × R
¢2,500/¢58,750 = R
R = 0.04255
R = 4.26% (Rate is reported in percentage)
Answer: His rate of Commission is 4.26%
 WORKED EXAMPLE 3
 A sales agent for the Shoprite mall receives a 10% commission on
sales above his quota. If his quota is ¢20,000, determine his
commission in a month that he made a sale of ¢45,800.

Solution:
Commission = Commission Amount(Ca) × Rate of commission
Commission Amount = ¢45,800 - ¢20,00 = ¢25,800
C = ¢25,800 × 0.10
C = ¢2,580
Answer: His commission for the month is ¢2,580
 TYPES OF COMMISSION
 Generally, there are about 5 types of commissions. They are:
1. Straight commission – a type of commission in which the agent or
salesman's earnings is based on commission alone. It is usually ‘one’
percent.
E.G 4. Marcus earns a 5% commission on sales. What is his earning if his
sale is ¢2,000.
 In this example, Marcus’s earning is based on the 5% commission
alone.
Solution:
C=S×R
C = ¢2,000 × 0.05
C = ¢100
2. Salary plus Commission – a type of commission in which the
agent’s earnings is based on a basic or fixed salary plus a
commission.
 Often times, the agent or sales officer has to meet a certain quota
to earn the salary.
Example 5: A sales agent receives a monthly salary of ¢2,450 plus
commission of 4.8% on all sales above ¢25,000. What is his total
earning if his total sales for the month is ¢63,000.
Solution:
Total earning = monthly salary + commission
But C = Ca × R and Ca = Sales – quota
Ca = ¢63,000 - ¢25,000 = ¢38,000
C = ¢38,000 × 0.048 = ¢1,824
Total earning = ¢2,450 + ¢1,824 = ¢4,274
3. Salary plus Bonus Commission – a type of commission in which
the sales agent receives a monthly plus a commission and/or
bonus for exceeding a certain sales quota.
 It is usually used to encourage sales performance of the sales
staff.
Example 6: Musah is a representative of a supermarket. He receives a monthly
salary of ¢18,700 plus 5.75% commission of all sales exceeding ¢37,000. Last
month, he had a total sales of ¢83,900. How much was his total earnings?
Solution:
Total earning = monthly salary + commission
Monthly salary = ¢18,700 C = Ca × R and Ca = Sales – quota
Ca = ¢83,900 – ¢37,00 = ¢46,900
C = ¢46,900 × 0.0575 = ¢2696.75
Total earning = ¢18,700 + ¢2,696.75
= ¢21, 396.75
4. Graduated Commission – a type of commission in which the total earning
of the sales agent is based on commission rates for different levels of sales.
 It is also a type of commission used as an incentive to encourage sales
officers to increase the volume of sales or their performance.
Example 7: Mansah’s total sales for the month of September was ¢27,500. How
much was her total commission if she is paid 15% commission of the first
¢10,000, 10% on the next ¢10,000, and 5% on all other sales.
Solution:
Total Commission = Commission on different levels of sales × Rate
of commission at the different levels.
Commission of first 10,000 = sales × rate of commission of first 10,000
Commission of first 10,000 = 10,000 × 0.15 = ¢1,500
Commission of next 10,000 = 10,000 × 0.10 = ¢1,000
Commission of other sales = 7,500 × 0.05 = ¢375
Total commission = ¢1,500 + ¢1,000 + ¢375
= ¢2,875
5. Over-ride Commission – an additional commission paid to a sales supervisor or head
of department based on store sales or the sales of the representatives who work under
the supervisor.
 This is usually calculated as a percentage of the store sales after the store quota
(where it exist) and store returns are deducted.
Example 8: Yakubu, a supervisor at the KNUST mall is paid a monthly salary of ¢1,200; a
personal commission of 2.45%; and over-ride of 3.5% on total store sales above
¢65,000. If in a given month his total personal sales is ¢43,200 and his personal
quota is ¢20,000, what is his total earning if the store sales for the month was
¢112,000.
Solution:
Total earning = Salary + personal commission + over-ride
Personal commission = (personal sales – personal quota) × personal rate
of commission
Personal commission = (¢43,200 - ¢20,000) × 0.0245 = ¢568.4
Over-ride = (Store sales – store quota) × override rate
Over-ride = (¢112,000 - ¢65,00) × 0.035 = ¢1,645
Total earning = ¢1,200 + ¢568.4 + ¢1,645
= ¢3,413.40
6. Outright commission and rebates – a commission or discount
given on purchases and/or gross/net sales.
 It is a type of straight commission and is usually a fixed percentage
of total purchases and/or gross/nets sales.
Example 9: MBK supermarket gives a 4.2% rebate on all purchases
above ¢1,500. Yaw bought goods worth ¢2,230.45 from the MBK
supermarket. What was his rebate.
Solution:
Yaw qualifies for the rebate since his purchases is above ¢1,500.
Rebate = Rebate amount × rebate rate
Rebate amount = Total purchases – minimum requirement
Rebate amount = ¢2,230.45 - ¢1,500 = ¢730.45
Rebate = ¢730.45 × 0.042
= ¢30.68
 DEALING WITH DRAWS
 A Draw is an amount made available to a sales officer or agent
as a loan against future commission that the officer or agent
would earn.

 It may or may not attract interest. Whether it attracts interest or

not depends on the organisation making the draw available.

 The aim of a draw is to provide a cushion for employees against

financial difficulties they may face.

 Such amounts (draws) are deducted from the total earning of

the sales officer or agent before they are paid.
 DEALING WITH DRAWS CONT’D
 Example 10. Musah is a representative of a supermarket. He
receives a monthly salary of ¢18,700 plus 5.75% commission of
all sales exceeding ¢37,000. Last month, he had a total sales of
¢83,900. How much was his take home earning if he has a draw
of ¢450 against his name?
Solution:
Take home earning = total earning – draws
From example 6, Musah’s total earning = ¢21,396.75
If his draw = ¢450,
then his take home earning = ¢21,396.75 - ¢450
= ¢20,946.75
 DEALING WITH RETURNS
 Returns are goods that customers take back to the shops where they
bought them either because they don’t like the good again or
because it is faulty and/or damaged.
 Such returns are deducted from total sales before commissions are
calculated.
 Where returns exist,

Commission amount = (Sales – returns) and

Commission = Commission amount × Rate of commission

Where quotas and returns exist,

Commission amount = (Sales – quotas – returns)
NB. Commission amount is the amount on which commission is
calculated.
 ASSIGNMENT 1
 Sales staff of the Mistel Shopping Mall as well as the supervisors are paid salary plus commission
for all sales above GHȻ15,000.00. Sales staff earn a commission of 4.5% for sales above
GHȻ15,000.00 up to GHȻ50,000.00. For sales above GHȻ50,000.00, they are paid an additional
3% commission on the excess of sales above GH¢50,000.00. Supervisors are paid a personal
commission of 2.5% for personal sales above GHȻ15,000.00 up to GHȻ50,000.00 and an override
of 3.5% on excess of store sales above GHȻ30,000.00. Senior supervisors are however paid 3%
personal commission for personal sales above GHȻ15,000.00 up to GH¢50,000.00 and an override
of 5% on excess of store sales above GHȻ30,000.00. Seidu is a senior supervisor and Selina is a
supervisor. Issifu, Yaw, Adzo, and Adiza are among the sales staff. At the end of October, 2014, the
store had total sales of GHȻ168,784.50 and returns of GHȻ16,780.00. An extract from the records
of the Mall showed the following.

Name of Basic Personal Personal Draws

Personnel Salary (GHȻ) Sales Returns (GHȻ)
(GHȻ) (GHȻ)
Mohammed 550.25 56,700.00 12,000.20 -
Seidu
AgyemangSelina 485.75 82,000.00 28,775.40 1,000
IssifuOpoku 300.00 42,565.00 - 300
Yaw Mensah 300.00 23,700.00 - 250
KwatzikorAdzo 300.00 48,200.00 1,230.15 -
Determine:
HarunaAdiza 300.00 45,155.00 1,172.10 150

I. Personal commission of each staff

II. Gross earnings of the supervisors
TRADE DISCOUNTS
 WHAT IS A TRADE DISCOUNT?
 A trade discount is a percentage reduction in the list price of a
merchandise.
 It is often given to repeated or large volume buyers for large
quantities of an item purchased.
 Discount rates are expressed as decimals or percentages.

 The amount determined for the item to be sold before any

discount is given is called the list price or catalog price.
 The amount paid for the item after the discount is called the net
price.
 The amount off the list price of the merchandise as a result of
the discount is the discount amount.
 The discount amount is computed using one of two methods
namely:
 The Discount method
 The Complement method

 The discount method is used when we are interested in knowing

both the net price and the actual amount of the discount.

 The complement method is used when we are interested in

knowing only the net price.
 THE DISCOUNT METHOD
 Under this method, the discount amount is computed using the
formula:

Discount amount = List price × discount rate

Net price = List price – discount amount
Example 1:
Compute the discount amount and net price for a ¢450 generator
offered at a 15% discount rate.
Solution:
Discount amount = ¢450 ×0.15 = ¢67.5
Net price = ¢450 - ¢67.5
= ¢382.5
Example 2: MB company sells a set of stainless steel trays at a list
price of ¢120 per tray. They give a discount of 6.75% for purchases
above ¢1,200. On-the-run restaurant purchased ¢2,500 worth of
trays.
I. What price did on-the-run pay for the set of trays after the discount?
II. What was the total discount amount?

Solution: (I)
Price to pay = List price – discount amount
Discount amount = List price × discount rate
= ¢120 × 0.0675 = ¢8.1
Price to pay = ¢120 - ¢8.1
= ¢111.9
Answer: On-the-run paid ¢111.9 per tray.
 (II)
Total discount amount = Total to pay before discount – Amount to
pay after discounts
Total to pay before discount = Ȼ2,500
Amount to pay after discount = number of trays bought × Ȼ111.9
(i.e. the price per tray after discount).
Number of trays bought = Ȼ2,500/Ȼ120 = 20.83
Since there is no .83 part of a tray, it means on-the-run restaurant
bought 21 trays but they were already given some rebate.
Therefore, amount to pay is = 21 × Ȼ111.9 = Ȼ2,349.9
Total discount amount = Ȼ2,500 - Ȼ2,349.9
= Ȼ150.1
NB. For this question, it is wrong to multiply 21 by 8.1 to determine the total
discount amount because by virtue of the fact that on-the-run was to pay
Ȼ2,500 for 21 trays, it means they had a rebate already. If we want to get exact
figures, then we have to work with the 20.83 and not 21 but then the question is:
How does a .83 tray look like?
 THE COMPLEMENT METHOD.
 The complement of a percentage figure is the difference
between that figure and 100%
 As mentioned earlier, the complement method is used to
determine only the net price.
 To calculate the net price using the complement method,

1. Subtract the discount rate from 100% to get the complement rate
2. Multiply the complement rate by the list price to get the net price.
Formula:
Net price = complement rate(s) × list price
Example 3:
Compute the net price for a ¢450 generator offered at a 15%
discount rate.
Solution:
Net price = complement rate × list price
List price = ¢ 450
Complement rate = 100% - 15% = 85%
Therefore:
Net price = 0.85 × ¢ 450
= ¢ 382.5
 DEALING WITH SERIES OF DISCOUNTS
 A series discount is a type of additional discounts given to buyers
for purchases beyond certain agreed levels.
 It is usually given on the list price

 It is usually used as an incentive to encourage large volume

purchases.
 A buyer is given a number of discount rates based on the level of
purchases.
 For example, a customer can be given 20% discount for purchases
up to Ȼ50,000, an additional 10% for purchases up to Ȼ80,000 and
a further 5% for purchases above Ȼ80,000.
 To determine the net price from such a transaction, we can either
use both the discount and the complement methods
 DEALING WITH SERIES DISCOUNTS
CONT’D
 We can compute a single discount from the series of discounts
given by subtracting the product of the discounts from 100%.
Example 5:
Mary received a series discount of 20%, 15% and 10% after purchasing goods
worth Ȼ100,000 from Poku Trading Enterprise. What was her discount rate?
Solution
First find the complement of all the discounts she was given.
100% - 20% = 80%; 100% - 15% = 85% and 100% - 10% = 90%

Next, you find the product of the complements = (.80 × .85 × .90= .612)

Then you find her discount rate = 100% - 61.2% = 38.8%

This means that she has been given a 38.8% discount of the list price and she is
expected to pay 61.2% of the list price.
Example 6: A trader received a series discount of 18%, 15% and 12% from
the purchase of a merchandise whose list price is Ȼ250. How much did this
trader pay for the merchandise if she met all the conditions necessary for the
discount.
Solution:
Net price = List price – discount amount
Discount amount = discount rate × list price
Discount rate = 100% - (product of complement rates)
Product of complements = .82 × .85 × .88 = 0.61336 or 61.34%
Discount rate = 100% - 61.34% = 38.66%
Discount amount = 0.3866 × Ȼ250 = Ȼ96.65
Therefore:
Net price = Ȼ250 - Ȼ96.65 = Ȼ153.35
This means that the trader paid Ȼ153.35 for the merchandise instead of the
Ȼ250.
NB: Solve this question using the complment method also
COMPUTING CASH DISCOUNTS FOR FULLY PAID
INVOICES
 Cash discounts are reductions in the total purchase amounts given
to buyers to encourage them to pay quickly.
 Usually, extra interest charges are instituted to discourage late
payment.
 Some businesses use both cash discounts and interest charges
while others use only cash discounts or interest charges to manage
their transactions.
 Which ever will be used, it has to be agreed upon by both the
buyer and the seller. Whatever is agreed or stipulated is referred to
as “terms of payment” or simply “terms”
 The terms describe details of the cash payments or penalty rates
and periods. In simple words, it is the condition governing the
payment of the loan (invoice amount)
 Usually in business, after delivering a merchandise, the seller issues
or sends a document called an invoice requesting payment.
 The invoice lists each item, its per unit cost (including packaging
and freight) and the total cost. The invoice also states the terms of
payment.
 The amount the buyer pays is called the remittance.
 The list price of the merchandise including allowance for returns and
excluding handling charges and other costs is the Net Purchase
Amount.
 Net purchase amount =Invoice amount – merchandise returns – freight
(handling and other costs).
 Cash discount = Discount rate × net purchase amount
 Cost of merchandise = net purchase amount – cash discount
 Remittance = cost of merchandise + freight (if any)
 Terms of payment are often expressed in the form 2/10, n/30; or
2-10, n-30; or 2/10, net 30.
 This is read as “two-ten, net thirty.”

 Such an expression means that the buyers can receive a cash

discount of 2% if he/she is able to pay for the merchandise in full
within 10 days of the invoice date; and the buyer will pay an
interest penalty if payment is not made after 30 days of the
invoice date.
 The date by which the discount can be received is called the
Discount date.
 The period from the invoice date to the discount date is the
discount period.
 The date after which penalty is charged is called the due date.

 The period from the invoice date to the due date is called the
payment period.
Example:
A buyer and a seller entered into the terms; 5/8, 3/12, 2/15, n/25. If
the invoice date is 28th October, determine:
I. The first, second and third discount dates.
II. The discount period
III. The payment period

Solution:
I.First discount date = 28th Oct + 8 days = 5th Nov

Second discount date = 28th Oct + 12 days = 9th Nov

Third discount date = 28th Oct + 15 days = 12th Nov
II.The discount period = Invoice date to 3rd discount date

= 28th Oct – 12th Nov

III.The payment period = 28th Oct + 25 days

= 22nd Nov
 WORKED EXAMPLE
 Suhulu Enterprise sold liquid soap to the BKT motors. The
invoice amount is Ȼ710, which includes Ȼ30 in freight charges.
The invoice date is July 13, and the terms are 2/10, n/30. BKT
motors returns Ȼ250 worth of merchandise and pays the rest of the
invoice before the discount date. Compute the cash discount and
the remittance. Determine also, the discount date and the due
date.
 Solution:

Net purchase amount = Ȼ710 – Ȼ250 – Ȼ30 = Ȼ430

Cash Discount = 0.02 × Ȼ430 = Ȼ8.6
Cost of merchandise = Ȼ430 - Ȼ8.6 = Ȼ421.4
Remittance = Ȼ421.4 + Ȼ30 = Ȼ451.4
Discount date = July 13 + 10 days = July 23
Due Date = July 13 + 30 days = August 12
 PRACTICE QUESTIONS
A. Use the following information to calculate the discount date, due
date, payment period, cash discount, and remittance.
Terms: 1/10, n/60
Invoice date: August 21
Invoice amount: Ȼ852.43
Returned goods: Ȼ187.23
Freight: Ȼ47.20

A. Calculate the remittance for the problem in part (a), using the
complement method.
 DEALING WITH CASH DISCOUNTS FOR
PARTIALLY PAID INVOICES
 Often times, buyers want to take advantage of a cash discount but
they can only afford to pay part of the invoice amount within the
discount period.
 In such instances, the invoice is reduced by the amount paid
(remittance) plus the amount of the discount.
 The total amount paid plus the amount of cash discount is called
the amount credited to the buyer’s account.
 The amount credited is best computed using the complement
method.
 The amount remaining after the part payment is called the Unpaid
balance.
 To compute the unpaid balance,
1. Compute the complement of the discount rate
(i.e. 100% - discount rate)

2. Compute the amount credited by dividing the amount

paid (remittance) by the complement rate.

3. Compute the unpaid balance by subtracting the amount credited

(step 2) from the invoice amount.
 WORKED EXAMPLE
 MMM buys building materials from Kwasi Oppong company
with an invoice price of Ȼ484 and terms of 4/10, net 40. Within
the 10-day discount period, the company sends in a check for
Ȼ300. (I) How much credit should MMM receive and what is their
unpaid balance? (II) What amount should MMM remit if
they wanted to reduce their unpaid balance by exactly Ȼ400?
 Solution: (I)
Step 1: Complement rate = 100% - 4% = 96%
Step 2: Amount credited = Ȼ300/0.96 = Ȼ312.50
Step 3: Unpaid balance = Ȼ484 - Ȼ312.50 = Ȼ171.50
Answers: Amounted credited = Ȼ312.50
Unpaid balance = Ȼ171.50
 (II)
Cash discount = 4% × Ȼ400 = Ȼ16
Remittance = Ȼ400 - Ȼ16 = Ȼ384
MMM has to remit Ȼ384 to be able to reduce their unpaid balance
by exactly Ȼ400.

PRACTICE QUESTIONS
An invoice for Ȼ476 has terms of 1/15, net 25. How much is the
unpaid balance after a Ȼ350 remittance is made within the discount
period?

An invoice for Ȼ565 has 2/15, net/25. What size remittance
should be made in order to have a total of Ȼ400.
DEALING WITH SALES AND PURCHASES FOR
PRINCIPALS
 Sometimes in business, producers send goods to agents for sale in
different markets or at a different location for sale at the best
possible price.
 Such a shipment is called a consignment.

 The party who sends the shipment is called the consignor;

and the party to whom the shipment is sent (i.e. the agent)
is called the consignee.
o Whatever amount the commission merchant gets from the

consignment is the gross proceeds. The commission is generally a

certain percent of the gross proceeds.
o All charges (transport, advertising, storage, insurance, etc) are

deducted from the gross proceeds. The resulting amount, which is

sent to the consignor, is the net proceeds.
 Example: Alhaji Musah, owner of AKD farms has been trying to sell a used
livestock truck and a used tractor. Unsuccessful after 3 months, Alhaji consigns
the items to Alex and Co. Equipment brokers at a commission rates of 6% on
the gross proceeds from the truck and 9% on the gross proceeds from the tractor.
Alex and Co. sell the truck for Ȼ42,500 and the tractor for Ȼ78,600. Alex and
Co. pay Ȼ610 to deliver the truck and Ȼ835 to deliver the tractor. What are the
net proceeds due to Alhaji Musah from the sale of the equipment.
 Solution:
Total proceeds = net proceeds from truck + net proceeds from
tractor.
Net proceeds = Gross proceeds – total charges
Total charges = Commission + freight/handling charges
Truck: Commission = 0.06 × Ȼ42,500 = Ȼ2,550
Freight +Ȼ610
Total charges = Ȼ3,160
 Net proceeds from truck = Ȼ42,500 - Ȼ3,160 = Ȼ39,340

Tractor: Commission = 0.09 × Ȼ78,600 = × Ȼ7,074

Freight +Ȼ835
Total charges Ȼ7,909
Net proceeds from tractor = Ȼ78,600 - Ȼ7,909 = Ȼ70,691

Total proceeds from sale of equipment = Ȼ39,340 + Ȼ70,691

= Ȼ110,031

 Along with the net proceeds, the commission merchant sends the
consignor a form known as an account sales.
 The account sales is a detailed statement of the amount of the sales
and the various deductions.
 AN EXAMPLE OF A ACCOUNT SALES
ALEX & Co. August 16, 2015 NO.67324
EQUIPMENT p. o. box, 51 tafo-mile 4 kumasi
BROKERS
NAME: Alhaji Musah Farms BELOW ARE ACCOUNT SALES OF Consignment No. 76
ADDRESS: P. O. Box Ao 41 RECEIVED August 1, 2015
Aboabo-Kumasi and sold for account of same

DATE CHARGES AMOUNT DATE SALES AMOUNT

Aug. 1 Freight (truck) Ȼ 610 Aug. 10 Truck Ȼ 42,500

16 6% Commission (Truck) 2,550
Net proceeds (Truck) 13 Tractor Ȼ 78,600
39,340 Gross Proceeds Ȼ 121,100
Freight (tractor)
9% Commission (Tractor) 835
Net proceeds (Tractor) 7,074
Total
70,691
Ȼ 121,100