Markup (business)

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For the US legislative term, see Markup (legislation). For other uses, see Markup.

Markup is the difference between the cost of a good or service and its selling price.^[1] A markup is added onto the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product.^[2] Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price.^[1] Retail markup is commonly calculated as the difference between wholesale price and retail price, as a percentage of wholesale. Other methods are also used.

Price determination

Fixed markup

Assume: Sale price is $2500, Product cost is $2000

Markup = Sale price − Cost

$500 = $2500 − $2000

Percentage markup

Cost x (1 + Markup) = Sale price

or solved for Markup = (Sale price / Cost) − 1

or solved for Markup = (Sale price − Cost) / Cost

Assume the sale price is $1.99 and the cost is $1.40

Markup = ($1.99 / 1.40) − 1 = 42%

or Markup = ($1.99 − $1.40) / $1.40 = 42%

To convert from markup to profit margin:

Sale price − Cost = Sale price x Profit margin

therefore Profit Margin = (Sale price - Cost) / Sale price

Margin = 1 − (1 / (Markup + 1))

or Margin = Markup/(Markup + 1)

Margin = 1 − (1 / (1 + 0.42)) = 29.5%

or Margin = ($1.99 − $1.40) / $1.99 = 29.6%

Aggregate supply framework

P = (1+μ) W. Where μ is the markup over costs. This is the pricing equation.

W = F(u,z) Pe . This is the wage setting relation. u is unemployment which negatively affects wages and z the catch all variable positively affects wages.

Sub the wage setting into the price setting to get the aggregate supply curve.

P = Pe(1+μ) F(u,z). This is the aggregate supply curve. Where the price is determined by expected price, unemployment and z the catch all variable.

References

↑ 1.0 1.1 Ingels, Jack (2009). Ornamental Horticulture: Science, Operations, & Management. Cengage Learning. p. 601. ISBN 978-1-4354-9816-7.
↑ Pradhan, Swapna (2007). Retailing Management. Tata McGraw-Hill. ISBN 978-0-07-062020-9.

External links

Markup Calculator - a simple web application which calculates markup.

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