Margin is not Markup.
βΆοΈ Margin shows how much of a product's sales price or revenue you got to keep.
βΆοΈ Markup shows how much over cost you've sold your product(s) for.
π― Let's dig deeper into each of these .
βΆοΈ Markup shows how much over cost you've sold your product(s) for.
π― Let's dig deeper into each of these .
1// Margin (or Gross Profit Margin in this case) is the proportion of a productβs Sales Price that exceeds the Product Cost.
βοΈ Margin = (Product Sales Price - Product Cost)/ Product Sales Price
βοΈ Margin = Gross Profit per Product / Product Sales Price x 100
βοΈ Margin = (Product Sales Price - Product Cost)/ Product Sales Price
βοΈ Margin = Gross Profit per Product / Product Sales Price x 100
Note that Margin is calculated as a percentage.
Meanwhile, Gross Profit is calculated as an amount.
2// Markup is the proportion by which you increase the Product Cost to arrive at the Sales Price.
βοΈ Markup = (Product Sales Price - Product Cost)/ Product Cost
Meanwhile, Gross Profit is calculated as an amount.
2// Markup is the proportion by which you increase the Product Cost to arrive at the Sales Price.
βοΈ Markup = (Product Sales Price - Product Cost)/ Product Cost
βοΈ Markup = Gross Profit per Product / Product Cost x 100
Markup can be calculated based on a product's variable cost or based on its total (absorption) cost.
Markup can be calculated based on a product's variable cost or based on its total (absorption) cost.
βοΈ Marking up the variable cost could result in under costing and underpricing the product, which in turn may increase revenues at the expense of reduced profitability and cash flows.
π Use Cost-Volume-Profit analysis to determine the number of units you will need to sell to break even.
βοΈ Marking up the absorption cost could result in over costing and overpricing, which in turn could reduce revenues also at the expense of reduced profitability and cash flows.
πBe careful with the fixed manufacturing depreciation expense which gets included in the full/absorption cost of a product.
π― To calculate your margin if you know your markup: βοΈ Margin = Markup /(1+Markup)
π― To calculate your margin if you know your markup: βοΈ Margin = Markup /(1+Markup)
π― To calculate your markup if you know your margin: βοΈ Markup = Margin / (1-Margin)
π― How to use Margin and Markup:
βοΈ Both Margin and Markup calculate the difference between price and cost.
βοΈ Margin relates that difference to Price or Revenue.
π― How to use Margin and Markup:
βοΈ Both Margin and Markup calculate the difference between price and cost.
βοΈ Margin relates that difference to Price or Revenue.
βοΈ Markup relates that difference to Cost.
βοΈ If you know the Product Cost, use Markup to determine an appropriate selling Price.
βοΈ If you know the Product Gross Profit, use it to determine the Gross Profit Margin and track profitability over time.
βοΈ If you know the Product Cost, use Markup to determine an appropriate selling Price.
βοΈ If you know the Product Gross Profit, use it to determine the Gross Profit Margin and track profitability over time.
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