Mark-up and Margins

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1 Introduction

Occasionally it is the case that all selling prices are calculated so as to give a fixed percentage profit.

This information means that if we know the cost of sales we are able to calculate the sales (and vice versa). Make sure that you can do the arithmetic, but that also you learn the terminology and remember the difference between a mark-up and a gross profit margin.

2 Mark-up

A mark-up is the gross profit expressed as a percentage of the cost.

Jelena has cost of goods sold of $20,000 and applies a mark-up of 20%.

What are the sales?

Karen has sales of $50,000 and applies a mark-up of 25%.

What is her cost of goods sold?

(a) Sales = 20,000 + (20% × 20,000) = $24,000

(b) 50,000 = x + (0.25 × x) = 1.25x

3 Gross profit margin

The gross profit margin is the gross profit expressed as a percentage of the selling price.

Peter has sales of $120,000. His gross profit margin is 20%.

What is his cost of goods sold?

Paul has a cost of goods sold of $45,000 and a gross profit margin of 25%.

What are his sales?

(a) Cost of goods sold = 120,000 – (20% × 120,000) = $96,000

(b) 45,000 = x – 0.25x = 0.75x

4 More complicated questions

Questions in the exam can test you on mark-ups and margins in a slightly more interesting way, as in the following example.

A business made purchases during the year of $90,000, and sales during the year of $120,000

The opening inventory was $30,000.

There had been a fire that had destroyed much of the inventory, and the inventory remaining at the end of the year was $12,000.

If the business always has a mark-up of 20% of cost, then what was the cost of the inventory that had been destroyed?

Answer the questions one at a time. Your progress is saved so you can leave and come back.

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