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I am studying through the chapter 18 on topic markup and margin but facing lots of questions.
1. In real life we use markup to decide the selling price for their product. For example if a company is introducing a new product in the market then we firstly need to calculate the estimated cost of the product from the market data then adds a fixed profit percentage to decide the selling price for their product?
2. In real life we use margin to decide the cost for their product. For example if a company is introducing a new product in the market then we firstly need to calculate the estimated selling price of the product from the market competitors then adds a fixed profit percentage to decide the cost for their product?
3. The word markup is used for profit expressed as a percentage of the cost which means that the business need to compute the cost first and adding profit amount to it to see what selling price they want to charge?
4. The word margin is used for profit expressed as a percentage of the selling price which means that the business need to compute the selling price first and adding profit amount to it to see what cost they want to charge for their product?
1. Some companies do indeed just add on a fixed margin in order to determine a selling price. However these days they are more likely to consider the prices that competitors are charging and also the affect of the selling price on the demand (a lower selling price might well result in selling more). However the different approaches that a company might take are examined in Paper PM and not in Paper FA.
2. Again in Paper PM (but not in Paper MA) companies may well use the margin to determine the maximum cost they can afford in order to achieve their required overall profit, and then look for ways of managing to keep the costs below this maximum. This is called target costing but is Paper PM and not Paper FA.
3 and 4 In Paper FA you are tested on the understanding of the terms ‘margin’ and ‘mark-up’ and the exam questions are testing your ability to use them – the types of questions are like those that I work through in the lectures.
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