What is Markup Percentage?
Markup Percentage is a percentage mark-up over the cost price to get the selling price and calculated as a ratio gross profit to the cost of the unit. In many cases, the companies that sell their products, during the process of decision making for selling price, take the cost price and use a mark-up, which, in general, is a small factor or a percentage of the cost price, and use that as the profit margin and decide the selling price.
Markup Percentage Formula
Markup Percentage can be calculated as the gross profit in terms of percentageGross Profit In Terms Of PercentageGross profit percentage is used by the management, investors, and financial analysts to know the economic health and profitability of the company after accounting for the cost of sales. Gross profit percentage formula = Gross profit / Total sales * 100% read more which would be of the cost of the unit and can be represented using the below formula:
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For eg:
Source: Markup Percentage (wallstreetmojo.com)
Hence, it can be stated that markup is a difference between the selling price and the cost of service or goods. And when this difference is taken as a percentage of the cost, it will be the markup percentage.
The numerator part of the formula is the margin that is desired by the business in order to maximize its profit and also to stay with competitors’ margin; otherwise, the customer will switch to a competitor who charges less. Therefore, the first step is to calculate the gross marginCalculate The Gross MarginGross Profit Margin is the ratio that calculates the profitability of the company after deducting the direct cost of goods sold from the revenue and is expressed as a percentage of sales. It doesn’t include any other expenses into account except the cost of goods sold.read more, which is nothing but the difference between the sales revenue or the selling price and the cost of goods sold or the cost price per unit.
The second step is to divide the margin or the gross profit by the cost of goods sold, which shall give us the markup percentage.
Calculation Examples of Markup Percentage
Let’s see some simple to advanced examples to understand it better.
Example#1
Consider the selling price of a bike is 200,000, and the cost price of the bike is 150,000. You are required to calculate the markup on the bike and markup percentage as well that the dealer is trying to implement on the same.
Solution:
Use the following data for the calculation.
Calculation of markup can be done as follows –
Markup = 200000 – 150000
Markup = 50000
So, the calculation of markup percentage can be done as follows –
Markup percentage = 50,000 / 150,000 * 100
Example#2
McDonald’s one of the famous brands in the world to make hamburgers. Mr. Wyatt, who eats a lot of these hamburgers, is interested in knowing what markup they apply and hence decided to review their income statement. Reviewing its income statement for the quarter ended December 2018, one can observe that for that quarter ended December 2018, it has reported revenue of $5.163 billion, and further, it has reported $2.697 billion as the gross profit. You are required to calculate the Markup Percentage that McDonald’s is applying to earn, and the cost of the goods sold.
Solution:
Use the following data for the calculation of markup percentage.
Calculation of cost of goods sold can be done as follows –
Cost of Goods Sold = 5.163 – 2.697
Cost of Goods Sold = 2.466
So, the calculation of markup percentage can be done as follows –
Markup Percentage = 2.697 / 2.466 * 100
Example#3
Ankit industries are based out of Surat from Gujarat in India and are operating under the textile business. Simula and the company have been appointed as the stock auditors for Ankit industries. Ankit industries need funds to expand the business and hence have applied for an overdraft facility with the State Bank. State Bank has gone through the application and was surprised to know that it reported a 78% markup margin and hence ask Simula and the company to investigate the number and if a found correct bank will fund the 80% of the loan requirement subject to fulfillment of other terms and conditions.
Solution:
Use the following data for the calculation of markup percentage
Calculation of cost of goods sold can be done as follows –
Cost of Goods Sold = 20000000 + 15000000 + 30000000 + 60000000 + 4000000
Cost of Goods Sold = 129000000
Calculation of gross profit can be done as follows –
Gross Profit = 229620000 – 129000000
Gross Profit = 100620000
So, the calculation of markup percentage can be done as follows –
Markup percentage = 100620000 / 129000000
Markup Percentage Calculator
You can use the following Markup Percentage Calculator
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Relevance and Uses
Understanding the markup is very crucial and important for the firm or the business. Take an example, establishing the strategy for pricing will be one of the key parts in terms of strategic pricing. The markup of a service or good should be enough to offset or say in order words to cover up all the business expenses, and it should also be able to generate a profit for the firm or the business.
Markup can be different for various industries, as the same cannot be static or normal. This would totally depend upon how good the reputation of the firm is, how loyal their customers are to their brand, switching costsSwitching CostsSwitching cost is the cost suffered by a customer when switching a service, product, or supplier. It includes not only financial costs, but also psychological costs, time costs, and so on.read more for a customer from the company’s product to the supplement product. Further, the pricing power of the company also helps in determining the markup that they desire.
You can download this Excel Template here – Markup Percentage Formula Excel Template
Recommended Articles
This has been a guide to Markup Percentage and its definition. Here we discuss how to calculate markup percentage using its formula along with examples and a downloadable excel template. You can learn more about financial analysis from the following articles –
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