How to Calculate Mark-up and Margin

Posted by: Patricia Barlow Post Date: 19th March 2014

If you’ve worked in a finance environment, you’ve probably heard phrases like ‘it has a huge mark-up’ or ‘the margins are tight on this product’.

But do you know exactly what this means, and how to calculate mark-up and margin? Let’s take a closer look.

Selling price

With any product or service that is sold, the correct sales price needs to be calculated.

How to Calculate Mark-up and Margin

The sales price needs to cover:

  • Cost of goods
  • Overheads
  • An amount of profit

Calculating mark-up

To calculate the sales price, you can use the mark-up method. This is where you add a percentage to the cost of goods sold to cover the overheads and the amount of profit required.

For example:

I work for a retail organisation that sells clothes. I buy a batch of trousers for £2,500 (this is the cost of goods sold).

I know there are overheads, including wages, heating costs etc. that I need to cover, and I would like to make a profit.

I decide that I will mark the goods up by 25%, as I believe this will cover the overheads, as well as giving me the required profit.

So what is the selling price?

The cost of goods sold represents 100%, and if the mark-up is 25%, then sales is 125%.

Divide the £2,500 by 100 to get the 1% figure, and multiply it by 125 to get the sales figure. This equals £3,125.

The profit I will make is £625.

Get the guide to stock valuation in accounting

Enter your details to access our expert resource

Stock valuation guide

(you can unsubscribe at any time by clicking the link at the bottom of an email)


Click submit once and you'll receive a confirmation email shortly

Calculating margin

The margin is the amount of profit made on sales as a percentage.

For example:

I work for a retail organisation that sells clothes. I buy a batch of trousers for £2,500 (this is the cost of goods sold).

I know that I would like to make a gross profit of 25%.

So what is the selling price?

The cost of goods sold represents 75%. This is because sales represents 100%, and the profit is 25%. So 100 – 25 = 75%.

Divide the £2,500 by 75 to get the 1% figure, and multiply it by 100 to get the sales figure. This equals £3,333.

The profit I will make is £833.

Remember

  • Mark-up = cost of sales is 100%
  • Margin = sales is 100%

Calculating mark-up and margin is covered in greater depth on the AAT qualification. To find out about advancing your knowledge and enhancing your career prospects, get in touch below.

Want to become a qualified accountant?

Get in touch below to find out how, or call us on
01332 613 688


Click submit once and you'll receive a confirmation email shortly

Share this post


By continuing to use the site, you agree to the use of cookies to improve your experience. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close