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I understand what are markup and margin calculations for the exam (thanks to you) but how they both are used in the real-life?
1) Markup is a profit as a % of the cost while margin is a profit as a % of the sales?
2) Is it true that companies use markup to decide the selling price of the product that would be reasonable for the consumers to afford and for business to make enough profits?
3) Markup calculation involves taking the cost then add profit markup to find out the selling price so it is always used by manufacturing businesses because they produce the goods themselves therefore they are know the cost of making them (it is not suitable for retail businesses)?
4) Is it true that companies use margin decide the cost of the product?
5) Margin calculation involves taking the selling price and then add the profit margin to find out the cost so it is always used by retail businesses because they don’t produce the goods themselves instead they buy ready-made goods from suppliers (other businesses) for the purpose to resale them. This is the reason they don’t know the actual cost of the product?
6) Mark-up and margin are just two different ways of showing the % profit in our financial statements but it depends on our business type (retail or manufacturing)?
7) Businesses might use a fixed mark-up to decide on a selling price, but there are lots of other factors they would take into account such as the prices being charged by competitors etc. Similarly businesses might use a fixed profit margin to decide on a cost, but there could be several othr factors to consider?
8) There is it indeed a link between margin and mark-up. Margin is the profit as a % of sales; mark-up is the profit as a % of cost which means a mark-up of 25% will mean a margin of 20% and vice versa. But how?
9) The main use of them in real life is as a measure of profitability that can be used to compare with previous years or with other businesses in order to see if they are doing better or worse?
Are they correct sir?
1. Yes
2 and 3. Very unlikely to be true these days – they use other approaches to decide on a selling price but other approaches are not examinable in POaper MA (not until Paper PM). It is no different for retail businesses (they know the cost because it is what they way for the goods!).
4.. No. They may used it to determine a target cost – this is explain in my free lectures. (Although in Paper MA only a basic understanding of target costing is examinable. Full application of target costing is not examined until Paper PM).
5. Retail businesses do know the cost – it is what they pay for the goods.
6. They are two different ways of showing the % profit, but they are not required to be shown in the financial statements (and the financial statements are not relevant for Paper MA). It does not depend on the type of business.
7. True, but other methods are not examinable until Paper PM (see answer to points 2 and 3)
8. True. As to how is just basic arithmetic and is explained in my free lectures.
9. Correct.
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