Do you confuse your Margins and Markups? Do you know what they are?
People often get confused between margins and markups and sometimes incorrectly use them interchangeably. Hopefully the explanation below will help.
You buy baked beans from your supplier for £0.50 per can.
You sell them for £1.00
This is a mark-up of £0.50
This can also be expressed as a mark-up of 100% i.e. you have added a profit of £0.50 (100% of the original cost).
Your profit of £0.50 is 50% of the sales price
This can be expressed as making a margin of 50%
Most retail and wholesale businesses will operate in this way. A shopkeeper will have a range of markups depending on the types of goods that they are selling.
Luxury goods typically have a much bigger mark up.
Quite often the supplier will suggest a mark-up by showing on their invoice the recommended retail price, but then deducting a trade discount. The trader can simply add the trade discount back when pricing up the goods.
A baked bean supplier might show on their invoice to the shop:
We express margin and markup in percentage terms.
Let’s look at this in terms of the annual trading account,
(for ease, we’ll assume that opening stock and closing stock are the same).
The Markup = C / B i.e. 60,000/60,000 x 100 = 100%
(We have marked up the cost of goods sold of £60,000 by 100% to arrive at our sales figure of £120,000)
The Margin = C / A i.e. 60,000/120,000 x 100 = 50%
Here are a range of margins and markups for you to see the inter-relationship between them – and to practice your algebra!!
We hope this makes the difference between your margins and markups clearer for you.