Financial Statement Analysis
- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Profit Margin Formula
- Profit Percentage Formula
- Profit Formula
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBITDA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Equity Ratio
- Return on Capital Employed (ROCE)
- ROCE Formula (Return on Capital Employed)
- Return on Invested Capital (ROIC)
- Return On Investment (ROI)
- Rate of Return on Investment
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Total Assets Formula
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Markup Percentage Formula
- Ratio Analysis (17+)
- Liquidity Ratios (29+)
- Turnover Ratios (17+)
- Efficiency Ratios (7+)
- Dividend Ratios (9+)
- Debt Ratios (26+)
Markup refers to a profit-margin ratio that gets added to the cost of a certain good in order to arrive at the selling price, by considering the profit/margin for that particular good as desired by the seller or producer.
It may also be the difference between an investment or security’s lowest current offering price contrast to the price which is charged to the customers and this is usually common among broker-dealers.
Types of Markup
- Consumer Goods MarkUps: In this case, the cost price is increased by a certain ratio to thus arrive at the selling price after considering the profit margin.
- Broker-Dealer MarkUps: When a dealer sells certain security to a retail customer from his own account, his only form of compensation comes from the markup, which essentially stands to be the difference between the purchase price and the price at which the dealer sells the security to the retail investor.
Markup Percentage Formula
To arrive at the markup, it becomes important that the markup percentage is calculated which is given by
The margin is nothing but the difference between the selling price and the cost of the product. Let us consider an example of markup formula.
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Example of Markup
Let’s take an example of markup.
Consider an example where Mr. John produces a certain product. The cost of the product being produced is $7 and Mr. John now desires a margin of $3.
Calculate the markup percentage and ascertain the selling price so as to enable John to achieve his desired margin.
Here the markup percentage comes up to 42.86% ($3 / $7).
If one were to now apply the markup percentage on the cost, we would multiply 7 * 1.4286 and would arrive at the selling price being $10.
Now the difference of $3 ($10 – $7) is the desired margin of the producer.
Markup Percentage = 42.86%
Advantages of Markup
There are certain advantages by making use of markups in pricing the product by a manufacturer as listed down below.
- Fixation of Margin – By keeping in mind the desired markup that is required, a manufacturer will be well placed to fixate on the margin as desired by him to pocket out on the profit. Hence the profit margin will be very well carved out leaving little scope for uncertainty.
- Control on Selling Price – By deciding on the desired markup required, a manufacturer or seller will be well in control of the selling price so as to enable him to stay firm with regard to the selling price and not make way for the negotiation of margins.
- Better Negotiation – Once the producer has decided on the margin arrived through markups he will be in a better position to bargain or negotiate on deals without affecting his profitability since the margin that he wants to earn is now very well fixated.
- Reduced Cost of Decision Making – When the required margin is pretty much fixed through the markup procedure, the management need not waste time and efforts in having to figure out the fair price, as they are pretty much clear with the cost that they have incurred and the required profits they would need to have it covered up. Hence there is no wastage of time and efforts on the part of the management. This overall effectiveness reduces the cost of decision making.
- Simple Method – The procedure is adopted in case of markup pricing is quite simple and does not take laborious tasks and procedures as the management is well aware of the cost that they have incurred and then go on to fix the minimum required margin to cover the same and thus provide for profits. It is done so by merely adding up the required margin to the cost and is in fact a really simple process.
- Minimum Information Dependence – The producer is relying on its own data with regard to cost and expense figures and hence there is little dependence on external information such as markets. The company or producer is making use of its own data to decide on the same.
Disadvantages of Markup
Following are some disadvantages of Markup.
- Not Future-Oriented – This method is not forward-looking as it does not consider the future demand for the product which usually is the base on which the decision around the fair price usually revolves.
- Competition not Considered – This method does not take into account the actions of the competitor and the impact of such actions on the price of the product. If one goes on to solely rely on internal company cost data to pick up the price of the product it surely is a recipe for disaster as it does not consider the external factors.
- Ignores Opportunity Cost – Opportunity cost being the cost of the next best alternative foregone, the company may sometimes go on to over-estimate the price of the product as it includes sunk cost but goes on to ignore opportunity costs totally. There may also be the presence of a certain personal bias while deciding on the profit margin that has to be added on to the product.
This method does not factor in external conditions and situations like consumer demand, external competition, etc. and is merely relying on internal cost data which may not make the product significantly efficient.
A producer may very well adopt a simple procedure of markup to arrive at the selling price by making way for the desired margin, after considering the markup into the cost of the product. This method is simplistic avoids too much dependence and reduces the cost of decision making.
However, since it suffers from not considering the factors like external competition, it becomes imperative that the management goes on to look at these factors such that the pricing of the product arrived at through a process of markups can be even more efficient. In this manner, both external and internal considerations, being a necessary margin for the producer, are pretty much factored in that makes the price all the more efficient.
This has been a guide to what is Markup and its Meaning. Here we discuss the formula to calculate markup percentage along with an example, advantages, and disadvantages. You can learn more about profitability ratios from the following articles –