Markup vs. Profit Margin
Markup vs. Profit Margin
Markup: the difference between the cost of a good or service and its selling price. A markup is added onto the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product. Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price.
Fixed markup:
Here is an example: Sale price is $2500, Product cost is $2000:
$500 = $2500 − $2000
Below shows markup as a percentage of the cost added to the cost to create a new total (ie. cost plus):
or solved for Markup = (Sale price / Cost) − 1
or solved for Markup = (Sale price − Cost) / Cost
For example, the sale price is $1.99 and the cost is $1.40
Markup = ($1.99 / 1.40) − 1 = 42%
or Markup = ($1.99 − $1.40) / $1.40 = 42%
Profit percentage:
On the other hand, profit percentage is calculated with cost price taken as base:
Suppose you buy something for $100 and sell it off for $150:
Cost price = $100
Selling price (revenue) = $150
Profit = $150 - $100 = $50
Profit percentage = $50/$100 = 50% (profit as percentage of cost price)
Profit margin = $50/$150 = 33.33% (profit as percentage of selling price or revenue)
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