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John Moffat.
John Moffat.-
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Anonymous
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Sir I watched the lecture but I have few questions related to markup and margin. PLEASE correct my doubts 🙂
1. Both markup and margin are the desired % profits that we used to calculate the selling price we want to charge to our customers?
2. To calculate the selling price using markup approach we charge the desired markup profit % on cost to calculate the selling price because the mark-up is the gross profit expressed as a percentage of the cost?
4. The markup is the gross profit expressed as a percentage of the cost. This means cost is 100% and markup profit is 20% then selling price is 120%.
5. To calculate the selling price using margin approach we charge the desired margin profit % on cost to calculate the selling price because the margin is the gross profit expressed as a percentage of the selling price?
6. The margin is the gross profit expressed as a percentage of the selling price. This means selling price is 100% and margin profit is 20% then the cost is 80%.
7. Please explain what is the point of using either method. Some businesses use markup and other uses margin but WHY?
John Moffat
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All your statements are correct.
Some business use mark-up because they know the cost and let that determine the selling price they need to charge.
Other businesses use margin because they decide how much customers are likely to be prepared to pay and so can calculate what they need to get the cost down to.
As you will find out in Paper PM, there are other more sensible ways these days of deciding on what selling price to charge, but they are not examinable in Paper FA.
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