|Markup||25.00%||Profit divided by cost|
|GP margin||20.00%||Profit divided by sales|
A markup is a profit as a percentage of the cost. (markup = profit divided by cost of sales)
A gross profit margin is a profit as a percentage of the sales price. (margin = profit divided by sales)
Markup is also known as cost markup or only Markup.
A gross profit margin is also known as GP margin, margin.
Let’s take an example of a company called Mokia Telecom LLC, which produces a product Nobile 111 and then sales it. The cost of sales for the company per product is $12 and the company sales this product by adding a profit of $3, for $15.
Now, how much is the Markup for this product, and how much is the gross profit margin?
We calculate Markup by dividing profit with the cost. So the profit of $3 is divided by the cost of $12 and by multiplying with 100 we will reach a markup of 25%.
For calculating GP margin, we divided the profit of $3 with the sales price of $15 and then we reach a gross profit margin of 20%.
Let’s say that Botania Pvt. Ltd made sales of $1,000,000 in a year. The company incurred a cost of sales of $650,000. Can you calculate Markup and margin for this company, before scrolling down further?
Ok, the answer is:
In this case, profit of the company is $350,000 ($1,000,000 minus $650,000). To calculate Markup, we will divide profit with cost, i.e., $350,000 divided by $650,000 will give us an answer for Markup of 53.85%.
For calculating margin the gross profit of $350,000 will be divided with sales amount of $1,000,000, giving us an answer of 35%.
Some complex examples
In some exams and assignments, you’ll find questions like below:
- A company has a profit margin of 25%, and its gross profit is $2,000. Calculate the sales amount.
- If a company’s sales are $50,000, what will be the Markup if GP margin is 20%?
- If a company want to achieve 20% GP margin, how much profit it will have to add to its cost of $100,000.
- Assuming that a company adds Markup of 30% to its cost, how much it needs to make sales to achieve a profit of $1,000,000.
Now, here, the trick is, you need to understand how to calculate markup and profit margin quickly. Always bear in mind that Markup is a percentage of cost, and GP margin (or gross profit margin or margin) is a percentage of sales amount.
Below formulas are given for answering the above questions (or any similar question). You can use that formula for which you have the maximum number of inputs available in the question.
Gross profit margin formula
Sales – gross profit = Cost
If you are using GP margin formula, please note that sales
will always be taken as 100%.
Mark up Formula
Cost + Markup = Sales
Given below are answers of above four questions:
If you are using Markup formula, please note that “Cost of Sales” will always be taken as 100%.
- The answer is $ 8,000: Calculated by dividing $2,000 with 25%.
- The answer is 25%: This is calculated by first determining profit amount using gross margin formula and then applying that profit amount using mark up formula.
- Answer is $25,000: This is calculated by dividing $100,000 by 80% and then subtracting $ 125,000 from $100,000.
- The answer is $4,333,000: This is calculated by applying the markup formula to determine the amount of cost of sales.
It is important to note that for both GP margin and Markup, we use only cost of sales and not the total cost. The cost of sales would include direct material, direct labour and direct overhead expenses absorbed.
Cost markup and profit margin are used in various industries and for multiple purposes, including pricing decisions and budgeting and planning. In financial sector mostly, the bank charge a markup, i.e., a profit on the value of the loan. So, if a banker says that bank will charge you a markup of 5%, this means that on the amount of the loan, an interest rate of 5% is applicable. Many financial analysts use GP margin for financial analysis in numerous sectors. Financial Analysts compare GP margin of companies to assess the financial performance of the company.