Introduction to Mark Up
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 at 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?
Markup pricing is the method of adding a certain percentage of markup to the cost price of the product to estimate the selling price of a product.
To make 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 goods sold and then include or add that markup in the cost.
Let us understand the concept of markup pricing through the markup pricing example.
Markup Pricing Example
Suppose, there is a mobile manufacturing company that 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 the 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 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 fewer 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.
The 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%
The 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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Compound Interest
Compound interest is the type of interest method where the interest is paid on both the principal and interest together which compounds at regular intervals. The interest collected on a principal over a while is also accounted for under the principal. The interest calculation for the next period is on the collected principal value. Compound interest is a relatively new technique of calculation of interest used for almost all financial and business dealings across the world. Compound interest is popular for its power of compounding. This can be understood, when we observe the compound interest values accumulated across consecutive periods. The compound interest is calculated at regular intervals like annually, quarterly, etc.
To calculate the new principal, the sum of the initial principal and the interest accumulated by that time is calculated.
Compound Interest can be calculated with the formula
Compound Interest = (Interest on the Principal) + (Compounded Interest in Regular Intervals)
Compound Interest Formula
The compound interest is calculated, after getting the total amount over some time( depending on the rate of interest and the initial principal). To calculate the Compound Interest on a given amount, the following formula is used-
A=P (1 + r/n)(nt)
(where 'P' is the principal amount, 'r' is the rate of interest, 'n' is frequency or no. of times the interest is compounded yearly and t is the overall term)
The above formula denotes the entire amount at the end of the period and contains the compounded interest and the principal. From this formula, the formula of compound interest can be extracted by subtracting the principal from this amount. The formula for calculating the compound interest is-
CI=P(1 + r/100)t - P
The above formula is to find Compound Interest when the given principal is compounded yearly and the amount after the period at percent rate of interest ‘r’.
Solved Example
1. If the Selling Price of the Chocolate Box is Rs. 500 and the Cost Price of the Chocolate Box is 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?
3 bits
- ＄1000
It depends
50%
2. A Shopkeeper Pays its Wholesaler $40 for a Certain Item, and Sells the Item for ＄75. What is the Markup Rate?
81%
55%
60%
87.5%
3. An Item Originally Priced at Rs. 55 is Marked 25% Off. Find the Selling Price.
Rs. 42
Rs.60
Rs.76
Rs. 41.25
FAQs on MarkUp
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.
3. What is profit and Loss?
In a transaction of anything, if the selling price is more significant than the cost price of the thing, the extra margin earned is termed as the Profit. While on the other hand, if in the transaction, the cost price of the thing is more significant than the selling price, the margin loss is called the Loss. Profit and Loss are the terms utilized to determine if a deal is advantageous or not. Cost Price (CP) is the price at which a thing is bought and Selling Price (SP) is the price at which a thing is sold. Marked price is the price imposed by the vendor on the label of the thing he wants to sell.
4. What is a Discount and how to calculate it?
Discount is the rebate/offer given by a seller to acquire more customers and convert more sales. Discounts are used by sellers to stand up in the competition. Discount is always supposed to be calculated on the Marked price of the item. Discounts are supposed to be given in such a way that the seller doesn't bear the loss. The discount on any product can be calculated by the formula- Discount = Marked Price - Selling Price. Discount is generally represented in percentages to grab the eye of the consumer. The Discount Percentage can be calculated by the formula- Discount (%) = (Discount/Marked Price) × 100
5. What is a Simple Interest and where is it used in real life?
Simple Interest is one of the methods to compute interest on the given money. The simple Interest method is always applied to the original principal amount with the same rate of interest applying every time cycle. The investment of money in the bank is an example of Simple Interest in real life. When we invest our money in any bank, the bank provides us with interest on our amount. The interest involved by the banks is of many types, one of them is simple interest. When a person borrows money from a bank or an economic administration to satisfy their requirements, the amount taken is called the loan. A loan is given for various reasons such as home loans, education loans, etc. A loan amount is mandated to be repaid by the person to the management on time with an extra amount, which is called the interest on the loan.
