What Is Mark-Up And How Does It Impact Gross Margin Percentage

June 18th, 2006 Comments off
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MARK-UP ON COST

 

Refers to profit expressed as a percentage of cost price.

 

FORMULA:

 

Mark-up = Gross profit /Cost of Goods Sold x 100

 

ILLUSTRATION:

 

Company sells two type of products A & B. Due to the high techelement in product A, the company is able to mark up higher on the product cost of A in relation to the more common product B.

 

                   Product A($)   Product B($)

Say Cost price   100             100

Add:

Mark-up            80                40

Selling price     180               140

Markup %    80% (80/100)     40% (40/100)

Gross margin% 44.4% (80/180)   28.5% (40/140)

 

SALIENT POINTS:

As per above illustration, the policy on mark up the product cost plays a vital part to enhance the Gross margin percentage (gross margin / revenue) of a company. The higher the mark up the higher is the gross margin percentage which goes to cover the business expenses and overheads.

Mark-up might get more complicated if a business has many products which for valid reasons need to be marked-up differently to attract different segment of the customers. Since it affects the gross margin, Management needs to collate proper records, etc so that they can be able to explain the variance or consistency of the gross margin percentage from one period to another.

 

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Financial Accounting

 
 

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