The price of any total quantity that is usually less than the original value of the commodity is known as the discount rate. Based on the concept of profit and loss, the discount is just the difference between the market price of a commodity and the selling price of the commodity. Further clarifying marked price and selling price of the commodity for you:
Marked Price of the commodity – the price of the commodity set up by the seller based on market standards.
Selling Price of the commodity – the price of the commodity at which it has been sold to the consumer.
Note that when the selling price of the commodity is less than the market price of the commodity, then the consumer is said to have gotten the discount on the specific commodity that he has purchased.
What is Discount Rate?
The reduced price of any particular commodity or service is known as its discount rate. The discount rate of any commodity is mentioned separately on the pack of the commodity. There are many reasons for a seller to provide a discount on any commodity. Some of them are mentioned below:
To encourage the retail distributors of the commodity.
To clear out the old stock.
To reward some potential customers.
To increase the sale of the commodity.
So, the discount rate is basically a strategy used by the sellers to attract the customers towards the purchase of a particular commodity. It is the easiest way to increase the demand for the commodity, and further, the sales of the commodity also increase.
Use of Discount Rate
The major use of the discount rate is to calculate the net present value of any firm. It is also utilized for the following purpose:
To represent the opportunity cost of a firm.
For the comparison between different investments.
Accounts for the time value of money.
It also accounts for the risk factor in an investment.
Types of Discount Rates
There are a few types of discount rates in corporate finance. Some of them are mentioned below:
Cost of Debt is used for calculating the fixed income security.
A risk-free rate is responsible for accounting the time value of money.
The cost of equity is used for calculating the equity of any particular firm.
WACC is used to calculate the enterprise value of any firm.
A predefined hurdle rate is considered for investing in the internal corporate projects for any firm.
How to Calculate Discount Rate
In mathematics, discount rate problems can be solved by using the simple discount rate formulas.
Formula 1.
Discount = Marked price of commodity – selling price of commodity
D = MP - SP
Here, MP is the real or the actual price of the commodity.
Whereas, SP is the price of the commodity that the customer pays to the seller
And, D(discount) is the percentage of the marked price.
Now, to calculate the discount rate, you will have to further solve the equation,
Discount Rate = p x r
Here, discount rate can be denoted by DR
Whereas, p is the principle amount of the commodity
And, r is the interest rate
So, please note that in order to calculate the discount rate of any commodity you must first know the marked price of the commodity and the selling price of the commodity.
Solved Example
Q1. Anita purchased a notebook. The original price of the notebook was RS.200 and she purchased it at a discount of 10%. Calculate the discount rate of the notebook purchased by Anita.
Ans1. Putting the values,
Principle amount of the notebook = Rs.200
Interest rate = 10%
Therefore,
DR = P X R
Putting the values in the equation,
DR = 200*10%
DR = 20
So, the discount rate of the notebook is Rs20.
Conclusion
To calculate the discount rate of any commodity, you must either know the interest rate of the commodity directly given in the question. If the interest rate of a commodity is not given in the question, then you have to first calculate it with the help of the market price of the commodity and the selling price of the commodity given in the question and further solve the equation as explained above.
FAQs on Discount Rate
1. What is a discount in the context of commercial Maths?
In commercial Maths, a discount is a reduction given on the marked price (MP) of an article. It is a type of sales promotion offered by sellers to attract customers. The discount is usually given as a certain percentage of the marked price. For example, a 20% discount on an item marked at Rs. 500 means a reduction of Rs. 100 from its label price.
2. What is the formula to calculate the discount rate?
The formula to calculate the discount rate as a percentage is:
Discount Rate (%) = (Discount Amount / Marked Price) × 100
- The Discount Amount is the Marked Price minus the Selling Price.
- The Marked Price (MP) is the original label price of the item.
3. How do you calculate the selling price of an item after a discount is applied?
To find the final selling price (SP) after a discount, you subtract the discount amount from the marked price (MP). The formula is:
Selling Price (SP) = Marked Price (MP) - Discount Amount
If the discount is given as a percentage, you first calculate the discount amount and then subtract it from the marked price.
4. Why is the discount always calculated on the marked price and not the cost price?
A discount is always calculated on the marked price (MP) because it represents a reduction from the price at which the item is offered for sale to the customer. The cost price (CP) is the price at which the seller originally bought the item. The discount is a promotional tool related to the selling transaction, so it is logically applied to the publicly displayed price (MP), not the seller's internal cost (CP).
5. How does a discount differ from an interest rate?
A discount and an interest rate are fundamentally different concepts in mathematics:
- A Discount is a reduction in the price of a product or service. It decreases the amount you have to pay. It is calculated on the marked price.
- An Interest Rate is the cost of borrowing money, or the rate of return on an investment. It is an additional amount added to the principal sum. It is calculated on the principal amount.
In short, a discount is a price reduction, while interest is an added cost for borrowing.
6. How do you calculate the final price after successive discounts, for example, 20% followed by 10%?
Successive discounts are not simply added together. They are applied one after another. For an item with a marked price (MP), a 20% discount followed by a 10% discount is calculated as follows:
- First Discount: Calculate 20% of the MP and subtract it. This gives you the first discounted price.
- Second Discount: Calculate 10% of the new, reduced price (not the original MP) and subtract it. This gives you the final selling price.
A common mistake is to add the percentages (20% + 10% = 30%), which would result in an incorrect, larger discount.
7. How can you find the original marked price if the selling price and discount percentage are known?
To find the original marked price (MP) when you know the selling price (SP) and the discount percentage (D%), you can use the following formula:
Marked Price (MP) = Selling Price (SP) / (1 - (Discount Percentage / 100))
For example, if an item was sold for Rs. 90 after a 10% discount, the MP would be Rs. 90 / (1 - 0.10) = Rs. 90 / 0.90 = Rs. 100.
8. Where can we see the application of discount rates in real life?
Discount rates are very common in everyday life. You can find them in various scenarios, such as:
- Retail Stores: During festive seasons, clearance sales, or special promotions (e.g., '50% off').
- E-commerce Websites: Offering discounts on electronics, clothing, and other goods.
- Restaurants: Providing discounts on total bills or specific food items.
- Service Industries: Salons, gyms, and travel agencies offering reduced prices to attract customers.
