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Margin, mark-up, and cost of sales

In this article we are going to talk about mark-up, margins, what they are and their differences. A mark-up is an amount that is added to the cost of a product or service. This can be expressed as a percentage or dollar figure. A margin determines how much something is as a percentage of (most commonly) sales. For instance, gross profit margin looks at what percentage gross profit is of sales. Net profit margin works out what percentage net profit is of sales. The formulas for both look as follows:


Markup


A business purchases widget A for $10 and sells it for $25.


As a percentage = $25 / $10 - 1

= 1.5 or 150%


As a numerical value = $25 - $10

= $15


The business purchases widget B for $12 and sells it for $15.


As a percentage = $15 / %12 - 1

= 0.25 or 25%


As a numerical value = $15 – $12

= $3


Margin


The business sells $1,200,000 of widget A which has cost of sales of $480,000.


Gross profit margin = (1,200,000 – 480,000) / 1,200,000

= 60%


The business sells $900,000 of widget B which has total cost of sales of $720,000


Gross profit margin = (900,000 – 720,000) / 900,000

= 20%


Generally, you want to achieve a higher gross profit margin. This indicates a higher percentage of total sales is attributable to profit versus cost of sales. With mark-up, you want to find a balance between total sales and profit and will be dependent on factors like industry, type of product, location of business, and method of sale. This theory also applies to margins.


Another value which import is important to businesses is cost of sales percentage. This is what percentage of total sales is attributable to the cost of sales. You will notice from the below this is the inverse result of the gross profit margin. It can be calculated using the below formula.


Cost of Sale %


Using the same figures from widget A above:

Cost of sale % = 480,000 / 1,200,000

= 40%


The same for widget B:

Cost of sale % = 720,000 / 900,000

= 80%


In contrast to the gross profit margin, achieving a lower cost of sale percentage indicates that you are able to achieve a higher profit on the sale of your product or service. Like with profit margin, higher profit is a positive indicator. Although, there are instances where this may not be the case. For example, sales may be lower because mark-up or profit margin is too high. Therefore, this sale price may not be competitive with other businesses in this space and hurt total sales and total profit expressed in dollar figures. Again, like with profit margin and mark-up, you want to balance a healthy cost of sales percentage with other factors such as total sales and profit in terms of

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