Formula to Calculate Markup
Markup formula calculates the amount or percentage of profits derived by the company over the cost price of the product and it is calculated by dividing the profit of the company by the cost price of the product multiply by 100 as it is shown in the percentage terms.
Markup basically refers to the difference between the average selling price per unit of a good or service and the average cost incurred per unit. Conversely, it can be said that it is the additional price over and above the total cost of the good or service, which is basically the profit for the seller. Mathematically it is represented as,
Another formula that can be used based on the information available in the income statement, wherein the calculation of markup is done by initially deducting the cost of goods sold from the sales revenue and then dividing the value by the number of units sold. Mathematically it is represented as,
Although the former formula is more popularly used, the latter can be as useful as the former since the information is easily available from the income statement.
Markup Calculation (Step by Step)
- Step 1: The formula for markup, in fact, is very simple. It is because the entire set of information required for its calculation is already contained in the income statement. The first step in the calculation of markup from the income statement is to figure out the sales revenue and the cost of goods sold. Now, also figure out the number of units sold during the accounting period.
- Step 2: Now, divide the sales revenue and the cost of goods sold by the number of units sold to get the average selling price per unit and the average cost per unit, respectively.
- Average selling price per unit = Sales revenue / No. of units sold.
- Average cost per unit = cost of goods sold / No. of units sold
- Step 3: Finally, the calculation of markup can be done by deducting the average cost per unit from the average selling price per unit.
If a product is sold for $200 per unit and cost per unit of production is $130, then the calculation of markup will be,
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- = $200 – $130 = $70
Let us consider an example to calculate the markup for a company called XYZ Limited. XYZ Limited is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year, XYZ Limited has earned $150,000 in total net sales for the sale of 1,000 units along with the following expenses.
- Salaries: (+) $50,000
- Rent: (+) $20,000
- Cost of Goods Sold = (Salaries + Rent)
- Cost of Goods Sold = $70,000
- Therefore, Average selling price per unit = $150,000 / 1,000 = $150 and
- Average cost per unit = $70,000 / 1,000 = $70
- Markup = $150 – $70 = $80
You can use the following calculator
|Markup Formula =||Average Selling Price Per Unit – Average Cost Per Unit|
|0 – 0 =||0|
Markup Calculation in Excel
Now let us take the Apple Inc.’s published financial statement Example for the last three accounting periods. Based on publicly available financial information, the Markup of Apple Inc. can be calculated for the accounting years 2016 to 2018.
Given below excel template contains the information required for the calculation.
We have calculated average selling price and average cost price using the below-given formula-
So the below-given template has the values of Average selling price and average cost price for the calculation of markup.
In the below given excel template, we have used the markup calculation.
So, the Markup of Apple Inc. will be-
From the above table, it can be seen that the markup per unit of various products for Apple Inc. has been continuously improving from $305 to $364 during the above mentioned period. This indicates the market strength that Apple Inc. relishes.
The understanding of markup is very important for a business as it governs the pricing strategy of a company, which is one of the most significant parts of a business. The markup of a good or service should be adequate enough to cover all the operating expenses and make a profit, which is the ultimate objective of any business. The extent of markup permitted to a retailer can determine the amount of money he can make from selling every unit of the product. Higher the markup, higher will be selling price to the consumer. And more the money the retailer will make and vice versa. The selling price that the retailer charges can be an indicator of the strength of that retailer in the market.
This has been a guide to Markup Formula. Here we learn how to calculate Markup along with practical examples and downloadable excel templates. You may learn more about accounting basics from the following articles –