What Is Markup Formula?
Markup formula calculates the amount or percentage of profits derived by the company over the product’s cost price. It is calculated by dividing the company’s profit by the cost price of the product multiplied by 100, as it is shown in the percentage terms.
It is used extensively in any business to decide the selling price of the product or service after adding a certain percentage to the cost of it. This should be such that the final amount should make the product sale profitable for the enterprise and, at the same time, remain competitive in the market and be able to attract customers.
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Markup Formula Explained
The markup formula in accounting is a method of calculating the prices of goods and services of an entity by adding a certain percentage to the unit cost of the product. It should be able to make the product profitable for sale and, at the same time, retain customers along with creating new ones. It should help the company survive the competition and grow.
Here, the cost is the amount the manufacturer or the seller of the product had to pay to make it ready for selling in the market. The final selling price is the amount the final customer will pay to the seller to buy the product.
Markup 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 the profit for the seller. . If it is multiplied wih 100, it shows the percentage markup formula. Mathematically it is represented as,
Another formula that can be used based on the information available in the income statement is the calculation of markup 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.
How To Calculation?
Below are the steps for markup calculation. Let us try to understand the same in detail. –
- The formula for markup is very simple. The entire set of information required for its calculation is already contained in the income statement. The first step in calculating markup from the income statement is to figure out the sales revenue and the cost of goods sold. Also, figure out the number of units sold during the accounting period.
- Now, divide the sales revenue and the cost of goods sold by the 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
- Finally, markup can be calculated by deducting the average cost per unit from the average selling price per unit.
Thus, the above steps are required for calculating markup formula.
Below are some examples of using this formula for pricing, which will help understand the concept.
If a product is sold for $200 per unit and the cost per unit of production is $130, then the calculation of markup will be,
- = $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 earned $150,000 in total net salesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company's gross 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
The above examples clearly explain the formula for better understanding.
We can use the following calculator
|Markup Formula =
|Average Selling Price Per Unit – Average Cost Per Unit
|0 – 0 =
Calculation In Excel
Now let us take Apple Inc.’s published financial statement Example for the last three accounting periods to understand the markup formula in excel. Based on publicly available financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc., the Markup of Apple Inc. can be calculated for the accounting years 2016 to 2018.
The below template for the markup formula in excel 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 calculating markup formula.
In the below given excel template, we have used the markup calculation.
So, the Markup of Apple Inc. will be-
The above table shows 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 markupMarkupThe percentage of profits derived over the cost price of the product sold is known as markup. It is determined by dividing the company's total profit by the cost price of the product and multiplying the result by 100. is very important for a business as it governs a company’s pricing strategy, which is one of the most significant parts of a business. The markup of a good or service should be adequate to cover all the operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit. 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. The higher the markup in the percentage markup formula, the higher the 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.
Markup Formula Vs Margin
These two financial concepts are extensively used in any business. Thus, iyt is necessary to know the difference between them.
- The former refers to the amount that the business adds to the cost of its goods or services which helps in deciding about the selling price. But the latter is the amount of the selling price over the cost price, that is a profit for the product.
- The markup formula in accounting is calculated as a percentage of the cost price added to the cost. In contrast, the latter is calculated by finding the difference between the selling price and cost and dividing it by the selling price, expressed as a percentage.
- Markup helps in measuring and deciding the selling price, whereas margin helps in identifying the profit percentage.
- A high markup amount does not signify high profit. Similarly, a high profit margin also does not signify a high markup.
However, it is essential for every company, in whichever industry they are, to maintain a balance between the margin and markup so that profitability is maximized and the company can stay ahead in the market competition.
This has been a Guide to what is Markup Formula. We explain its calculation in excel, differences with margin, calculator with example & how to calculate. You may learn more about accounting basics from the following articles –
- Formula of Absorption Costing
- Margin vs. Markup
- Contribution vs. Gross Margin
- Marginal Costing vs. Absorption CostingMarginal Costing Vs. Absorption CostingBoth Marginal Costing and Absorption Costing are two different approaches used to evaluate inventory. In the case of marginal costing, only variable cost incurred by the company is applied to the inventory. In the case of absorption costing, the company's variable and fixed costs are applied to the inventory.