Girish Mahajan (Editor)

Markup (business)

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Markup is the ratio between the cost of a good or service and its selling price. It is expressed as a percentage over the cost. A markup is added onto the total cost incurred by the producer of a good or service in order to cover the costs of doing business and create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product. Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price. Retail markup is commonly calculated as the difference between wholesale price and retail price, as a percentage of wholesale. Other methods are also used.

Contents

Profit

  • Assume: Sale price is 2500, Product cost is 2000
    • Profit = Sale price − Cost 500 = 2500 − 2000

    Markup

    Below shows markup as a percentage of the cost added to the cost to create a new total (i.e. cost plus).

  • Cost × (1 + Markup) = Sale price
    • or solved for Markup = (Sale price / Cost) − 1 or solved for Markup = (Sale price − Cost) / Cost
  • Assume the sale price is $1.99 and the cost is $1.40
    • Markup = ($1.99 / 1.40) − 1 = 42% or Markup = ($1.99 − $1.40) / $1.40 = 42%
  • To convert from markup to profit margin:
    • Sale price − Cost = Sale price × Profit margin therefore Profit Margin = (Sale price − Cost) / Sale price Margin = 1 − (1 / (Markup + 1)) or Margin = Markup/(Markup + 1) Margin = 1 − (1 / (1 + 0.42)) = 29.5% or Margin = ($1.99 − $1.40) / $1.99 = 29.6%

    Another method of calculating markup is based on percentage of cost. This method eliminates the two-step process above and incorporates the ability of discount pricing.

  • For instance cost of an item is 75.00 with 25% markup discount.
    • 75.00/(1 − .25) = 75.00/.75 = 100.00

    Comparing the two methods for discounting:

  • 75.00 × (1 + .25) = 93.75 sale price with a 25% discount
    • 93.75 × (1 − .25) = 93.75 × .75 = 70.31(25) cost was 75.00 and if sold for 70.31 both the markup and the discount is 25%
  • 75.00 /(1 − .25) = 100.00 sale price with a 25% discount
    • 100.00 × (1 − .25) = 100.00 × .75 = 75.00 cost was 75.00 and if sold for 75.00 both the profit margin and the discount is 25%

    These examples show the difference between adding a percentage of a number to a number and asking of what number is this number X% of. If the markup has to include more than just profit, such as overhead, it can be included as such:

  • cost × 1.25 = sale price

    • or

  • cost / .75 = sale price

    • Aggregate supply framework

    P = (1+μ) W. Where μ is the markup over costs. This is the pricing equation.

    W = F(u,z) Pe . This is the wage setting relation. u is unemployment which negatively affects wages and z the catch all variable positively affects wages.

    Sub the wage setting into the price setting to get the aggregate supply curve.

    P = Pe(1+μ) F(u,z). This is the aggregate supply curve. Where the price is determined by expected price, unemployment and z the catch all variable.

    References

    Markup (business) Wikipedia
    (Text) CC BY-SA