Markup

Markup Meaning

Mark up is the total profit or gross profit earned on a specific commodity or service. It is denoted as a percentage over a cost price. For example, the cost of a good is Rs. 100 and the good sold is of Rs. 150, so the markup will be 50%. 

The cost of a good or the cost price of the commodity is the price on which the buyer purchases the goods from the shopkeeper. The cost price is often represented as (CP). On the other hand, the selling price of a good or SP is the price at which the shopkeeper sells the goods to the buyer. The term markup is widely used in business studies. Markup is defined as the difference between the selling price and the cost price of a good. The profit and loss of a business are easily determined through markup.

Markup Formula

As we know, markup is the difference between the selling price and the cost price of the product. Hence, the markup formula is represented as :

Markup formula - Selling price of a product  (SP) - Cost price of a product (CP)

What is the Markup Price?

The markup pricing is the method of adding a certain percentage of markup to the cost price of the product in order to estimate the selling price of a product. 

In order to make the use of mark-up, the companies initially determine the cost price of the product and further decide the amount of profit to be earned over the cost of the good solds and then include or add that markup in the cost.

Let us understand the concept of markup pricing though the markup pricing example.

Markup Pricing Example

Suppose, there is a mobile manufacturing company who has the following cost and sales expectations.

Variable cost per unit - Rs. 30

Fixed cost - 5,00,000

Expected Unit Sales - Rs. 50,000

The unit cost is Variable cost + Fixed cost / Unit sales

Hence, the unit cost = 30 + 500000/ 50000 = RS. 40

Once the cost is estimated, the manufacturer decides to add a 20% markup on sales. The markup price formula for the above markup pricing example is given as 

Markup price - Unit cost / 1- desired return on a product = 40/ 1-0.2 =50

Hence, the manufacturer should ask Rs. 50 from a buyer to earn a  desired profit of Rs. 10

Markup Price Formula

As we know, the markup price is the additional price or profit earned by the seller over and above the total cost of the product or service. Mark up price is also defined as the difference between average selling price per unit and the average cost price per product.

Hence, the markup price formula = Sales Revenue- Cost of goods sold/ Number of units sold.

Markup price formula is also derived as the Average selling price per unit - Average cost price per unit.

Markup Percentage

Markup percentage is a percentage markup over the cost price of a product to determine the selling price of a product. It is calculated as a ratio of gross profit to the cost price of the unit. Most of the time, the company sells their product during the process of making decisions for the selling price, they take the cost price and use markup which is generally a small factor or a percentage of the cost price, and make use of that as a profit margin and decide the selling price.

Markup Percentage Formula

To calculate the markup percentage, we use the following markup percentage formula

Selling  Price = Cost Price x (1 + Markup)

or

Markup = (selling price/cost price) – 1

Markup = (Sale Price-Cost)/Cost

Markup Percentage formula = 100 × (Selling price – Cost Price)/Cost price

Difference Between Margin and the Markup

The difference between margin and markup is such that margin is the difference between sales and cost of goods sold while markup is the price by which the cost of a good is increased in order to determine the selling price. The margin is also known as gross margin. A mistake in markup and magin can lead to the price determination being substantially too low or too high resulting in less sales or less profit. It can also have adverse effects on market shares as an excessively high price or low price may be beyond the price imposed by the competitors. 

We can easily calculate the profit margin of a product in the following way if we know the markup.

Selling price of a product – Cost price of a product  = Selling Price of a product × Profit Margin

Hence, 

Profit margin = (Selling Price – Cost Price)/Selling Price

Margin = 1 – (1 /(markup +1))

Or

Margin = markup/1+markup

For example,  if the markup is 50%, then profit margin;

Margin = 50/(1+0.5) = 50/1.5 = 33.33%

Difference Between Markup and Margin can also be Determined from the Following Point.

  • To achieve a gross margin of 10%, the company mark up price percentage should be 11.1%

  • To achieve a gross margin of 40%, the company mark up price percentage should be 80%

  • To achieve a  gross margin of 50%, the company mark up price percentage should be 100%

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Solved Example

1. If the Selling Price of the Chocolate Box is Rs. 500 and the Cost Price of the Chocolate Box are Rs. 150. Find the Markup Percentage.

Solution: Given, Selling price of the chocolate box = Rs. 500

The cost price of the chocolate box  = Rs. 150

Markup percentage formula = 100 × (Selling price – Cost Price)/Cost price

Markup percentage = 100 × ( 500 - 150)/ 150

= 100 × 350/ 150

= 233.33%

2.  If the Markup Rate Used by a Shopkeeper on a Toy Car is 50%, if the Cost Price of a Toy Car is Rs.1000, Find the Selling Price of a Toy Car?

Solution: Markup = 50% of cost price 

Markup = 50% of 1000

= 50/100 × 1000

= 500

Selling price = cost price + markup

= 500 + 1000

= 1500

Selling Price = Rs.1500

Hence, the selling price of a toy car -= Rs. 1500

3. The Overall Sales Revenue of a Company X is $20000. The Cost of the Goods Sold by the Company is $10000. The Number of Units Sold by the Company is 1000. Find the Markup Price for Company X.

Solution: Let us use the markup price formula to calculate the markup price for company X.

Markup price- (Sales Revenue - cost price of the unit sold) / Number of units sold.

Markup Price = ($20000 - $10000)/1000

Markup Price = $10000/ 1000

Markup price = $10 for each unit.

Quiz Time

1. Which of the Following is the Type of Term Most Probably Answer to the Question? What is the Markup on this Item?

  1. 3 bits

  2. $1000
  3. It depends

  4. 50%

2.  A Shopkeeper Pays its Wholesaler $40 for a Certain Item, and Sells the Item for $75. What is the Markup Rate?

  1. 81%

  2. 55%

  3. 60%

  4. 87.5%

3.  An Item Originally Priced at Rs. 55 is Marked 25% Off. Find the Selling Price.

  1. Rs. 42

  2. Rs.60

  3. Rs.76

  4. Rs. 41.25

FAQ (Frequently Asked Questions)

1. What are the Importance and Use of Markup Price Formulas?

Markup price is one of the most important measures used by organizations and businesses to determine their pricing strategy. The main objective of every business is to earn profit and hence markup price should itself be such that the cost of the goods sold and operating costs are considered so that the company overall turns a profit. The organization should determine the margin of the price that can be stretched which consumers can easily purchase and thus not find any further drop in sales. Hence, the cost price and the extent of markup should be such that the business eventually makes a profit. The higher selling price imposed by the company indicates that the customers are highly confident about the company even if it is imposing a higher price. Markup price is important for the company that starts its operations because it helps them to estimate their cash flows.

2. How is Markup Price Different from the Gross Profit Margin?

Mark up price is different from the gross profit margin, markup is generally used by the companies to choose a selling price so that it covers the production cost and earns a profit. While gross profit margin is used to determine the profitability of the company mostly by its investors. Another way to differentiate markup price and gross profit margin is that markup is a cost multiplier whereas the gross profit margin is the percentage of the selling price. Mark up is an approximation of cost while the gross profit margin is an approximation function of sales. Markup is specified from the perspective of the buyer while gross profit is specified from the perspective of the seller.