Discounts from vendors save you money and, leveraged strategically, can be an important part of your company's purchasing plan. If you have the space and the capital, you may buy in volume when a discount is available and lower your cost of goods sold by paying less for essential materials. But discounts are typically temporary deals, so it's unwise to use them as a basis for figuring final costs, although they can certainly help in the short term. To base your price on an actual rather than a discounted cost, you must be able to work backwards to calculate the original price without the benefit of the discount.

Tip

Use the following formula to calculate an original price after discount: Discounted price = (100 percent - discount percent) x (original price)

Calculating Discounted Price 

The sale price is the original price minus the discount, which can be expressed as a percentage of the original price. Formulated as an equation the discount calculation looks like this:

(original price) - (original price x discount percentage) = discounted price

For instance, if the original price was $500 and you receive a 20 percent discount, your equation would look like this:

$500 - ($500 x 20 percent) = discounted price.

20 percent of $500 is $100, so the discounted price is $500 - $100, or $400.

Calculating Original Price From Discounted Price

To calculate the original price from the discounted price, work backwards from the equation above.

(Discounted price) = (100 percent - discount percent) x (original price)

In the above example, this equation would read as follows:

$400 = (100 percent - 20 percent) x (original price)

100 percent minus 20 percent is 80 percent, or 0.8. Expressed as an algebraic equation, $400 = 0.8(Y), where Y is the original price. Divide each side by 0.8 to solve for Y. $400 divided by 0.8 equals $500, which is the original price.

Advantages and Disadvantages of Discounted Prices

It's tempting to buy in volume when your business can find goods at discounted prices, but this strategy isn't always prudent. If your money is tied up in materials that you may not actually use in the foreseeable future, you might not have the funds you require when you need them for immediate expenses such as rent and payroll. Inventory takes up space that you may need for more important uses such as production. Also, consumer demand can change and you can't always anticipate what your customers will be buying in the time it takes to go through the inventory you have on hand. Although purchasing materials at a discount can save your business money, it's best to weigh a variety of factors before making major investments in discounted back stock.