Choosing the mark-up percentage

Hi Jyok.

Thanks for your question…

So for CIMA P1 (in relating to pricing) you just need to know how to turn a cost into a selling price using one of two methods… ‘markup & margin’

This is just saying the markup can be an arbitrary figure or may have a purpose behind the markup % that is set for the company. …

eg The company might say we want a 20% markup on every product cost ( just because they see that as a good target mark-up)

OR
the markup figure may relate to the recouping of return on the investment made – for example the capital which has been invested in developing the product before it is finally released for sale.

Imagine there has been an investment needed of $10,000 capital to develop a new product. The investors of this capital will want some type of return on their money which will need to come via profit earned when the product is eventually sold…

For example they may want 12% return on their investment in the first year – so $10,000 * 1.12 =$1,200 return must be earned by the product profit from sales.

If estimated sales units of the product is 1000 units in that year, then each product, will need to earn a profit of $1.20 profit per unit in order to ensure the $1,200 is returned .

If the cost of manufacturing the product is ‘say’ $16 cost per unit.. as above, we need to make $1.20 profit each then our markup has to be 7.5%
( 1.20 is 7.5% of $16 cost)

Eg
Cost of $16
Markup will be 7.5% of this = $1.20
We sell 1000 units, so total profit figure is $1200 ( so achieved the target return on capital)

Hope that makes sense
Thanks
Cath