Margin is not Markup

 

▶️ Margin shows how much of a product's sales price or revenue you got to keep.

▶️ Markup shows how much over cost you've sold your product(s) for.

🎯 Let's dig deeper into each of these .

1// Margin (or Gross Profit Margin in this case) is the proportion of a product’s Sales Price that exceeds the Product Cost.

☑️ Margin = (Product Sales Price - Product Cost)/ Product Sales Price

☑️ 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.

☑️ Markup = (Product Sales Price - Product Cost)/ Product Cost

☑️ 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.

☑️ 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.

💎 Use Cost-Volume-Profit analysis to determine the number of units you will need to sell to break even.

☑️ 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.

💎Be careful with the fixed manufacturing depreciation expense which gets included in the full/absorption cost of a product.

🎯 To calculate your margin if you know your markup: ☑️ Margin = Markup /(1+Markup)

🎯 To calculate your markup if you know your margin: ☑️ Markup = Margin / (1-Margin)

🎯 How to use Margin and Markup:

☑️ Both Margin and Markup calculate the difference between price and cost.

☑️ Margin relates that difference to Price or Revenue.

☑️ Markup relates that difference to Cost.

☑️ If you know the Product Cost, use Markup to determine an appropriate selling Price.

☑️ If you know the Product Gross Profit, use it to determine the Gross Profit Margin and track profitability over time.

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