Understanding Gross Margin and Markup | Study notes Business Accounting

What is 'Gross Margin'

Gross margin is a company's total salesrevenueminus itscost of goods sold, divided by the

total sales revenue, expressed as a percentage. The gross margin represents the percent of total

sales revenue that the company retains after incurring thedirect costsassociated with producing

the goods and services sold by a company. The higher the percentage, the more the company

retains on each dollar of sales to service its other costs and obligations.

Gross profitis theprofita company makes after deducting the costs associated with making

and selling its products, or the costs associated with providing its services.Gross profitwill

appear on a company's income statement or can be calculated with this formula:Gross profit=

revenue - cost of goods sold.

Selling price Theactualfinal priceof aproductorservicethatcompanycharges apurchaserto

buy the item.

Bydefinition, themarkup percentage calculationis cost Xmarkup percentage, and then

add that to the original unit cost to arrive at the sales price. For example, if a product costs

$100, the selling price with a 25%markupwould be $125: Gross Profit Margin = Sales Price –

Unit Cost = $125 – $100 = $25.

Difference between margin and mark up

Margin(also known as gross margin) is sales minus the cost of goods sold. For example, if a

product sells for $100 and costs $70 to manufacture, its margin is $30. Or, stated as a

percentage, the margin percentage is 30% (calculated as the margin divided by sales).

Markupis the amount by which the cost of a product is increased in order to derive the selling

price. To use the preceding example, a markup of $30 from the $70 cost yields the $100 price.

Or, stated as a percentage, the markup percentage is 42.9% (calculated as the markup amount

divided by the product cost).

It is easy to see where a person could get into trouble deriving prices if there is confusion about

the meaning of margins and markups. Essentially, if you want to derive a certain margin, you

have to markup a product cost by a percentage greater than the amount of the margin, since the

basis for the markup calculation is cost, rather than revenue; since the cost figure should be

lower than the revenue figure, the markup percentage must be higher than the margin

percentage.

The markup calculation is more likely to result in pricing changes over time than a margin-

based price, because the cost upon which the markup figure is based may vary over time; or its

calculation may vary, resulting in different costs which therefore lead to different prices.

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What is 'Gross Margin' Gross margin is a company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. The gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company. The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations. Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company's income statement or can be calculated with this formula: Gross profit = revenue - cost of goods sold. Selling price The actual final price of a product or service that company charges a purchaser to buy the item. By definition , the markup percentage calculation is cost X markup percentage , and then add that to the original unit cost to arrive at the sales price. For example, if a product costs $100, the selling price with a 25% markup would be $125: Gross Profit Margin = Sales Price – Unit Cost = $125 – $100 = $25. Difference between margin and mark up  Margin (also known as gross margin) is sales minus the cost of goods sold. For example, if a product sells for $100 and costs $70 to manufacture, its margin is $30. Or, stated as a percentage, the margin percentage is 30% (calculated as the margin divided by sales).  Markup is the amount by which the cost of a product is increased in order to derive the selling price. To use the preceding example, a markup of $30 from the $70 cost yields the $100 price. Or, stated as a percentage, the markup percentage is 42.9% (calculated as the markup amount divided by the product cost). It is easy to see where a person could get into trouble deriving prices if there is confusion about the meaning of margins and markups. Essentially, if you want to derive a certain margin, you have to markup a product cost by a percentage greater than the amount of the margin, since the basis for the markup calculation is cost, rather than revenue; since the cost figure should be lower than the revenue figure, the markup percentage must be higher than the margin percentage. The markup calculation is more likely to result in pricing changes over time than a margin- based price, because the cost upon which the markup figure is based may vary over time; or its calculation may vary, resulting in different costs which therefore lead to different prices.

The following bullet points note the differences between the margin and markup percentages at discrete intervals:  To arrive at a 10% margin, the markup percentage is 11.1%  To arrive at a 20% margin, the markup percentage is 25.0%  To arrive at a 30% margin, the markup percentage is 42.9%  To arrive at a 40% margin, the markup percentage is 80.0%  To arrive at a 50% margin, the markup percentage is 100.0% To derive other markup percentages, the calculation is: Desired margin / Cost of goods For example, if you know that the cost of a product is $7 and you want to earn a margin of $ on it, the calculation of the markup percentage is: $5 Margin / $7 Cost = 71.4% If we multiply the $7 cost by 1.714, we arrive at a price of $12. The difference between the $ price and the $7 cost is the desired margin of $5.

Understanding Gross Margin and Markup, Study notes of Business Accounting

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