▶️ 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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