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What is Markup Formula?
Markup formula 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 which 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.
Explanation of the Markup Margin Formula
The markup margin can be derived in the following two steps:
- Step 1: The formula for markup, in fact, is very simple since 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.
Examples of Markup Formula
Let us see some examples to understand the Markup Margin.
Markup Margin Formula Example #1
If a product is sold for $200 per unit and cost per unit of production is $130, then the calculation of markup will be,
- Markup = $200 – $130
- Markup = $70
Markup Margin Formula Example #2
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
- Markup = $80
Markup Formula Calculator
You can use the following Markup Formula Calculator
|Markup Formula =||Average Selling Price Per Unit – Average Cost Per Unit|
|0 – 0 =||0|
Relevance and Use of Markup Formula
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 can charge can be an indicator of the strength of that retailer in the market.
Markup Formula in Excel (with excel template)
Now let us take the real-life example of Apple Inc.’s published financial statement 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 of Markup Margin.
For the calculation of markup margin first, 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 margin calculation to find the Markup of Apple Inc.
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 which indicates the market strength that Apple Inc. relishes.
You can download this Markup Formula Excel template here – Markup Formula Excel Template
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This has been a guide to Markup Formula. Here we discuss how to calculate Markup Margin along with practical examples and downloadable excel templates. You may learn more about accounting basics from the following articles –