What is Markup Percentage?

Markup Percentage Formula

Markup Percentage can be calculated as the gross profit in terms of percentageGross Profit In Terms Of PercentageGross profit percentage is used by the management, investors, and financial analysts to know the economic health and profitability of the company after accounting for the cost of sales. Gross profit percentage formula = Gross profit / Total sales * 100% read more which would be of the cost of the unit and can be represented using the below formula:

Markup Percentage: Gross Profit / Cost of Unit x 100

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Hence, it can state that markup is a difference between the selling price and the cost of service or goods. And when this difference is taken as a percentage of the cost, it will be the markup percentage.

The numerator part of the formula is the margin desired by the business to maximize its profit and stay with competitors’ margin; otherwise, the customer will switch to a competitor who charges less. Therefore, the first step is to calculate the gross marginCalculate The Gross MarginGross Profit Margin is the ratio that calculates the profitability of the company after deducting the direct cost of goods sold from the revenue and is expressed as a percentage of sales. It doesn’t include any other expenses into account except the cost of goods sold.read more, which is nothing but the difference between the sales revenue or the selling price and the cost of goods sold or the cost price per unit.

The second step is to divide the margin or the gross profit by the cost of goods sold, which shall give us the markup percentage.

Calculation Examples of Markup Percentage

Let’s see some simple to advanced examples to understand them better.

Example#1

Consider the selling price of a bike is 200,000, and the cost price of the bike is 150,000. You are required to calculate the markup on the bike and markup percentage that the dealer is trying to implement on the same.

Solution:

Use the following data for the calculation.

Calculation of markup can be done as follows –

Markup = 200000 – 150000

Markup = 50000

So, the calculation of markup percentage can be done as follows –

Markup percentage = 50,000 / 150,000 * 100

Example#2

McDonald’s is one of the famous brands in the world that makes hamburgers. Mr. Wyatt, who eats a lot of these hamburgers, is interested in knowing what markup they apply and hence decided to review their income statement. Reviewing its income statement for the quarter ended December 2018, one can observe that for that quarter ended December 2018, it has reported revenue of $5.163 billion. Further, it has reported $2.697 billion as the gross profit. You must calculate the Markup Percentage that McDonald’s is applying to earn and the cost of the goods sold.

Use the following data for the calculation of markup percentage.

Calculation of cost of goods sold can be done as follows –

Cost of Goods Sold = 5.163 – 2.697

Cost of Goods Sold = 2.466

Markup Percentage = 2.697 / 2.466 * 100

Example#3

Ankit industries are based out of Surat from Gujarat in India and are operating under the textile business. Simula and the company have been appointed as the Ankit Industries stock auditors. Ankit industries need funds to expand the business and have applied for an overdraft facilityOverdraft FacilityOverdraft is a banking facility that offers short-term credit to the account holders by allowing them to withdraw money from their savings or current account even if their account balance is or below zero. Its authorized limit differs from customer to customer.read more with the State Bank. State Bank has gone through the application and was surprised to know that it reported a 78% markup margin. Hence, it asked Simula and the company to investigate the number and if a found right bank will fund the 80% of the loan requirement subject to fulfillment of other terms and conditions.

Cost of Goods Sold = 20000000 + 15000000 + 30000000 + 60000000 + 4000000

Cost of Goods Sold = 129000000

Calculation of gross profit can be done as follows –

Gross Profit = 229620000 – 129000000

Gross Profit = 100620000

Markup percentage = 100620000 / 129000000

Markup Percentage Calculator

You can use the following Markup Percentage Calculator

Relevance and Uses

Understanding the 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 crucial for the firm or the business. For example, establishing the strategy for pricing will be one of the key parts of strategic pricing. The markup of a service or good should be enough to offset or say, in order words, to cover up all the business expensesBusiness ExpensesBusiness expenses are those incurred in order to successfully run, operate, and maintain a business. Travel & conveyance, salaries, rent, entertainment, telephone and internet expenses are all examples of business expenses.read more,  and it should also be able to generate a profit for the firm or the business.

Markup can be different for various industries, as the same cannot be static or normal. It would depend upon how good the firm’s reputation is, how loyal their customers are to their brand, switching costsSwitching CostsSwitching cost is the cost suffered by a customer when switching a service, product, or supplier. It includes not only financial costs, but also psychological costs, time costs, and so on.read more for a customer from the company’s product to the supplement product. Further, the company’s pricing powerPricing PowerPricing power refers to the power of an entity to choose the desired price for its product or service without the risk of losing its demand or customer base. Generally, it is an attribute of companies that are market leaders or monopolies.read more also helps determine the markup that they desire.

You can download this Excel Template here – Markup Percentage Formula Excel Template

This has been a guide to Markup Percentage and its definition. Here we discuss how to calculate markup percentage using its formula and examples and a downloadable excel template. You can learn more about financial analysis from the following articles –

  • Calculate ProfitFormula of MarkupMargin vs. MarkupFormula of Profit Percentage