Markup Formula

Markup formula calculates the amount or percentage of profits derived by the company over the product's cost price. It is calculated by dividing the company's profit by the cost price of the product multiplied by 100, as it is shown in the percentage terms.

It is used extensively in any business to decide the selling price of the product or service after adding a certain percentage to the cost of it. This should be such that the final amount should make the product sale profitable for the enterprise and, at the same time, remain competitive in the market and be able to attract customers.

The markup formula in accounting is a method of calculating the prices of goods and services of an entity by adding a certain percentage to the unit cost of the product. It should be able to make the product profitable for sale and, at the same time, retain customers along with creating new ones. It should help the company survive the competition and grow.

Here, the cost is the amount the manufacturer or the seller of the product had to pay to make it ready for selling in the market. The final selling price is the amount the final customer will pay to the seller to buy the product.

Markup refers to the difference between the average selling price per unit of a good or service and the average cost incurred per unit. Conversely, it can be said that it is the additional price over and above the total cost of the good or service, which is the profit for the seller. . If it is multiplied wih 100, it shows the percentage markup formula. Mathematically it is represented as,

Another formula that can be used based on the information available in the income statement is the calculation of markup by initially deducting the cost of goods sold from the sales revenue and then dividing the value by the number of units sold. Mathematically it is represented as,

Although the former formula is more popularly used, the latter can be as useful as the former since the information is easily available from the income statement.

Thus, the above steps are required for calculating markup formula.

Below are some examples of using this formula for pricing, which will help understand the concept.

Example #1

If a product is sold for $200 per unit and the cost per unit of production is $130, then the calculation of markup will be,

• = $200 - $130 = $70

Example #2

Let us consider an example to calculate the markup for a company called XYZ Limited. XYZ Limited is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year, XYZ Limited earned $150,000 in total net sales for the sale of 1,000 units along with the following expenses.

• Salaries: (+) $50,000
• Rent: (+) $20,000
• Cost of Goods Sold = (Salaries + Rent)
• Cost of Goods Sold = $70,000
• Therefore, Average selling price per unit = $150,000 / 1,000 = $150 and
• Average cost per unit = $70,000 / 1,000 = $70

Finally,

• Markup = $150 - $70 = $80

The above examples clearly explain the formula for better understanding.

Now let us take Apple Inc.’s published financial statement Example for the last three accounting periods to understand the markup formula in excel. Based on publicly available financial information, the Markup of Apple Inc. can be calculated for the accounting years 2016 to 2018.

The below template for the markup formula in excel contains the information required for the calculation.

We have calculated average selling price and average cost price using the below-given formula-

So the below-given template has the values of Average selling price and average cost price for the calculating markup formula.

In the below given excel template, we have used the markup calculation.

So, the Markup of Apple Inc. will be-

The above table shows that the markup per unit of various products for Apple Inc. has been continuously improving from $305 to $364 during the above mentioned period. This indicates the market strength that Apple Inc. relishes.

The understanding of markup is very important for a business as it governs a company's pricing strategy, which is one of the most significant parts of a business. The markup of a good or service should be adequate to cover all the operating expenses and make a profit, which is the ultimate objective of any business. The extent of markup permitted to a retailer can determine the amount of money he can make from selling every unit of the product. The higher the markup in the percentage markup formula, the higher the selling price to the consumer. And more the money the retailer will make and vice versa. The selling price that the retailer charges can be an indicator of the strength of that retailer in the market.

These two financial concepts are extensively used in any business. Thus, iyt is necessary to know the difference between them.

• The former refers to the amount that the business adds to the cost of its goods or services which helps in deciding about the selling price. But the latter is the amount of the selling price over the cost price, that is a profit for the product.

• The markup formula in accounting is calculated as a percentage of the cost price added to the cost. In contrast, the latter is calculated by finding the difference between the selling price and cost and dividing it by the selling price, expressed as a percentage.

• Markup helps in measuring and deciding the selling price,   whereas margin helps in identifying the profit percentage.

• A high markup amount does not signify high profit. Similarly, a high profit margin also does not signify a high markup.

However, it is essential for every company, in whichever industry they are, to maintain a balance between the margin and markup so that profitability is maximized and the company can stay ahead in the market competition.