August 28, 2015

Markup vs. Margin

Markup sets a price. Margin is how much profit was made once it rings the register.

Markup is used to compute a selling price. Markup is the amount a retailer raises the wholesale cost of an item. The markup is the amount that is added to the cost of goods to achieve a retail price.

In the illustrated example, the product has a cost of $1 and it has a markup of $0.50 resulting in a selling price of $1.50. The $0.50 markup is the same as the $0.50 gross profit. However, the markup is often expressed as a percentage of cost. In the example the $0.50 markup is divided by the cost of $1 resulting in a markup of 50%. The markup is half of the cost of goods and then added to the cost to achieve the retail price.

Margin is used to figure profits after a product is sold. Margin or profit is defined as sales minus cost of goods sold. If a retailer sells a product for $1.50 which had a cost of $1, the gross profit or gross margin is $ 0.50. The gross profit ratio or the gross margin ratio expresses the gross profit or gross margin amount as a percentage of sales. In this example the gross margin ratio is 33%
($0.50 divided by $1.50).

Markup formulas
Markup Percentage = Gross Profit or Margin/Unit Cost = $0.50/$1.00 = 50%.
New Retail with Markup Percentage =
1.00 - Desired Markup Percentage = X
Cost ÷ X = Retail Price
Margin formula
Gross Margin Percentage = (Gross Profit/Sales Price) X 100 = ($0.50/$1.50) X 100 = 33%.

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