Formula to Calculate Markup

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. Mathematically it is represented as,

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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.

Markup Calculation (Step by Step)

Examples

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,

  • The formula for markup is very simple. The entire set of information required for its calculation is already contained in the income statement. The first step in calculating markup from the income statement is to figure out the sales revenue and the cost of goods sold. Also, figure out the number of units sold during the accounting period. Now, divide the sales revenue and the cost of goods sold by the units sold to get the average selling price per unit and the average cost per unit, respectively. Average selling price per unit = Sales revenue / No. of units sold.Average cost per unit = cost of goods sold / No. of units sold Finally, markup can be calculated by deducting the average cost per unit from the average selling price per unit.

Average selling price per unit = Sales revenue / No. of units sold.Average cost per unit = cost of goods sold / No. of units sold

  • = $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 salesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company’s gross sales.read more for the sale of 1,000 units along with the following expenses.

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

Finally,

  • Markup = $150 – $70 = $80

Markup Calculator

You can use the following calculator

Markup Calculation in Excel

Now let us take Apple Inc.’s published financial statement Example for the last three accounting periods. Based on publicly available financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more, the Markup of Apple Inc. can be calculated for the accounting years 2016 to 2018.

The below excel template 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 markup calculation.

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.

Uses

The understanding of markupMarkupThe percentage of profits derived over the cost price of the product sold is known as markup. It is determined by dividing the company’s total profit by the cost price of the product and multiplying the result by 100.read more 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 expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more 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, 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.

This has been a guide to Markup Formula. Here we learn how to calculate markup, practical examples, and downloadable excel templates. You may learn more about accounting basics from the following articles –

  • Formula of Absorption CostingMargin vs. MarkupContribution vs. Gross MarginMarginal Costing vs. Absorption CostingMarginal Costing Vs. Absorption CostingBoth Marginal Costing and Absorption Costing are two different approaches used to evaluate inventory. In the case of marginal costing, only variable cost incurred by the company is applied to the inventory. In the case of absorption costing, the company’s variable and fixed costs are applied to the inventory.read more