The meaning of markup is the gross or total profit on a particular commodity or service. It is also represented as a percentage over a cost price. For example, the cost of a product is Rs.100 and it is sold for Rs.150, here the markup will be 50%.
Students come across the terms of selling price and cost price while learning about the facts of business. The cost price of a commodity is the price on which it is purchased from the merchant. Whereas, the selling price is the price on which it is sold. Markup is also an essential terminology used in business studies. It is defined as the difference between the cost price and selling price of the product. The profit and loss in a business can be estimated based on it.
Markup is just the opposite factor of discount. In discount, we usually reduce the actual amount from its initial amount with some percentage, but in markup, we increase the price of a commodity with some percentage of the original amount.
Markup is defined as the difference between the retail price of the commodity and its cost. It is mostly used to apply to the amount added to the cost to determine the retail prices of individual items. If there is a rise in the price of a particular item for sale, we add the amount to a cost price in calculating the selling price.
Profit: If the sale price of the product is more than the cost of the product, then the seller here get profit on the product. Suppose, sale price of a shirt is 2000 and its actual cost is 1700, then;
Profit = sale price – cost
Profit = 2000 -1700 = INR 3000.
A markup is combined with the total cost price acquired by the manufacturer of a good or service to meet the costs of doing business and generate a profit. The total cost indicates the total price of both fixed and variable investments to generate and distribute a product. Markup can be represented as a fixed amount or as a percentage of the total cost price or selling price. Retail markup is usually calculated as the difference between the wholesale price and retail price, as a percentage of wholesale.
As defined, markup is the difference between the selling price of a product and cost price.
|Markup = Retail – Cost|
To calculate the percentage of markup we have to use the following formula;
Sale Price = Cost x (1 + Markup)
Markup = (sale price/cost) – 1
Markup = (Sale Price-Cost)/Cost
|Markup Percentage = 100 × (Sale price – Cost Price)/Cost|
Let us understand the above expression with the help of an example.
Example: If the sale price of a dress is Rs. 500 and the exact cost of the dress is Rs. 150. Calculate markup percentage.
Solution: Given, Sale price = Rs.500
Cost Price= Rs.150
From the formula of markup percentage we know;
Markup Percentage = 100 × (Sale price – Cost Price)/Cost
Markup Percentage = 100 × (500 – 150)/150 = 100 × 350/150 = 233.33%
Markup and Margin
If we know the markup, then we can calculate the profit margin in a product.
Selling Price – Cost Price = Selling Price x Profit Margin
Profit margin = (Selling Price – Cost Price)/Selling Price
Margin = 1 – (1 /(markup +1))
Margin = markup/1+markup
Suppose if the markup is 30%, then profit margin;
Margin = 30/(1+0.31) = 30/1.31 = 22.9%
Q.1: A shopkeeper is using a 40% markup rate on software for computers, if the cost price of a game is Rs.2000, Calculate the selling price of a game?
Solution: Markup = 40% × cost price
Markup = 40% × 2000
= 40/100 × 2000
Selling price = cost + markup
=800 + 2000
Selling Price is Rs.2800.
Question 2: If the markup used by the retailer is 50%, then find the cost of a watch, if the selling price for that is Rs.5000.
Solution: Let us assume the cost price is x.
Markup = 50% of the cost, the selling price will be the sum of markup and cost.
5000 = x + (50/100) x
5000 = x + 0.5x
1.5x = 5000
x = 3333.33
So the cost of the shoes is Rs.3333.33.
Question 3: If a merchant is using the markup as 50% on an item, then find the selling price of that item if the cost is given as Rs.100.
Solution: Markup = 50% of the cost price
Markup = 50% of 100 = 50
Selling price = cost + markup
So the selling price of the item is Rs.150.