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Markup (business)

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Markup (business)

Markup is the difference between the cost of a good or service and its selling price.[1] A markup is added onto the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product.[2] Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price.[1] Retail markup is commonly calculated as the difference between wholesale price and retail price, as a percentage of wholesale. Other methods are also used.

Price determination

Fixed markup

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

Percentage markup

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

  • Cost x (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%
Sale price − Cost = Sale price x 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 X (1 + .25)= 93.75 sale price with a 25% discount
93.75 X (1 -.25) = 93.75 x (.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 X (1 -.25) = 100.00 X (.75) = 75.00
cost was 75.00 and if sold for 75.00 both the markup 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 X 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.

See also

References

  1. ^ a b Ingels, Jack (2009). Ornamental Horticulture: Science, Operations, & Management. Cengage Learning. p. 601.  
  2. ^ Pradhan, Swapna (2007). Retailing Management. Tata McGraw-Hill.  

External links

  • Markup Calculator - a simple web application which calculates markup.
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