The Cost of Overhead Minus the Selling Price

What is Markup?

Markup refers to the difference between the selling cost of a good or service and its cost. It is expressed as a pct higher up the cost. In other words, it is the premium over the

total cost of the good

or service that provides the seller with a

profit
.

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Markup Percent Formula

The formula for computing markup percentage can be expressed as:

For example, if a product costs $10 and the selling price is $15, the markup percentage would be ($xv – $10) / $10 = 0.50 x 100 = 50%.

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Instance

John is the owner of a company that specializes in the manufacturing of part computers and printers. He recently received a large order from a company for thirty computers and 5 printers. In improver, the company tasked John with installing software into each of the computers.

The cost per computer is $500 and the cost per printer is $100. The price of installing the software to run on all the computers is $two,000. If John wants to earn a 20% profit for the order, what would exist the price he needs to charge?

Step 1:
Calculate the total cost of the order (computers + printers + installation of software). $500 ten xxx + $100 ten v + $2,000 = $17,500 (full cost).

Pace 2:
Determine the selling toll by using the desired percentage of xx%. xx% = (Selling Price – $17,500) / $17,500  therefore Selling price must be: $21,000 (selling price).

Therefore, for John to accomplish the desired markup percentage of twenty%, John would need to charge the company $21,000.

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The Importance of Understanding Markup

Understanding markup is very important for a business concern. For instance, establishing a good

pricing strategy

is 1 of the most important tools a profitable business concern can take. The markup of a proficient or service must be enough to outset all business expenses and generate a

profit.

The Difference Between Markup and Gross Margin

A lot of people use the terms markup and gross margin interchangeably. Although both terms are used to assistance determine profitability, they are different!

Markup
is the difference betwixt a product’s selling price and cost as a percentage of the cost. For example, if a product sells for $125 and costs $100, the boosted toll increment is ($125 – $100) / $100) x 100 = 25%.

Gross margin
is the difference between a product’southward selling price and the cost as a pct of revenue. For instance, if a product sells for $125 and costs $100, the gross margin is ($125 – $100) / $125 = 0.two(twenty%) = 20%.

Retrieve the case higher up. The gross margin would be ($21,000 – $17,500) / $21,000 = 0.1667 = 16.67%. While the markup was 20%

Intuitively, the markup is always larger, as compared to the gross margin, as shown in the table below. (As long as you charge more than than what the product costs.)

Markups in Dissimilar Industries

Markup per centum varies greatly depending on the industry. In some industries, the increase is a tiny pct (5%-10%) of the total cost of the production or service, while other industries are able to mark up their products or services by an extraordinarily high corporeality.

Therefore, in that location is no “normal” markup percent that applies to all products, although there may be an boilerplate for a particular industry. Larn more near industry assay in CFI’due south Financial Analyst Training Program.

Related Readings

Thank you for reading CFI’s guide to Markup. To go along learning and advancing your career, these additional CFI resources will be helpful:

• Net Income
• Operating Margin
• Sales Acquirement
• Projecting Income Statement Line Items