How to Calculate Markup: A Guide for Business Owners and Accountants

Markup is a pricing strategy that allows businesses to add a profit margin to their cost of goods sold (COGS). It is an essential aspect of business operations as it helps to determine the price that customers pay for products or services. Understanding how to calculate markup is crucial for business owners and accountants as it impacts profit margins and pricing decisions.

What is Markup?

Markup refers to the percentage or amount added to the COGS to arrive at the selling price of a product or service. It represents the profit margin that a business wants to achieve on each sale. Markup is different from margin, which is the percentage of profit calculated based on the selling price of a product or service.

Markup Formula

The markup formula is a simple calculation that involves dividing the profit by the COGS and multiplying the result by 100 to get the percentage markup.

Markup % = (Profit / COGS) x 100

For example, if the COGS of a product is $100 and the business wants to achieve a 30% markup, the selling price would be:

Selling price = COGS + Markup
Selling price = $100 + ($100 x 30%)
Selling price = $100 + $30
Selling price = $130

In this case, the markup is $30 or 30%.

Markup vs. Gross Profit

It is essential to understand the difference between markup and gross profit. Markup is the percentage added to the COGS to arrive at the selling price, while gross profit is the amount of money left over after deducting the COGS from the selling price. The gross profit margin is calculated as a percentage of the selling price.

Gross Profit Margin = (Gross Profit / Selling Price) x 100

For example, if the selling price of a product is $200, and the COGS is $100, the gross profit is $100. The gross profit margin would be:

Gross Profit Margin = (Gross Profit / Selling Price) x 100
Gross Profit Margin = ($100 / $200) x 100
Gross Profit Margin = 50%

Calculating Markup on Cost Price or Selling Price

Businesses can use either the cost price or selling price to calculate the markup. The cost-plus pricing strategy involves adding a markup to the COGS to determine the selling price. On the other hand, the target pricing strategy involves determining the selling price based on a target markup percentage.

Markup on Cost Price:
Markup % = (Profit / COGS) x 100

Markup on Selling Price:
Markup % = (Profit / Selling Price) x 100

For example, if the business wants to achieve a markup of 40% on a product that costs $100, the selling price would be:

Markup on Cost Price:
Selling Price = COGS + Markup
Selling Price = $100 + ($100 x 40%)
Selling Price = $100 + $40
Selling Price = $140

Markup on Selling Price:
Selling Price = COGS / (100 - Markup %) x 100
Selling Price = $100 / (100 - 40%) x 100
Selling Price = $100 / 60% x 100
Selling Price = $166.67

In this case, the selling price would be $140 if the markup is based on the cost price and $166.67 if it is based on the selling price.

Conclusion

Markup is an essential pricing strategy that allows businesses to add a profit margin to their COGS. Calculating markup is crucial for businesses as it helps to determine the selling price of products or services.