Mark up
Mark up is defined as the rate of gross profit to cost of sales:
Mark up = Gross Profit
Cost of sales
Margin is defined as the rate of gross profit to sales:
Margin = Gross profit
Sales
Calculations of markup and margin are necessary to compute the profit loading on:
- Closing stock at the branch
- Returns from branch to head office
Examination questions may provide information on either the markup or the margin. If one is provided, it may be necessary to compute the other.
Let us assume: X = Gross Profit
Y = Sales
Therefore: Margin = Gross Profit = X
Sales Y
However: Sales – Costs = Gross Profit
Or: Costs = Sales – Gross Profit
Which is stated as: Costs = Y – X
And since: Mark up = Gross Profit
Costs
This is stated as: Mark up = X
Y – X
In summary, if: Margin = P/Q
Then the related Markup shall be P/(Q – P)
Using similar arguments, it can be established tat if the Markup is give by P/Q,
Then the related margin shall be P/(Q+P)