Margin and Mark-up

This fundamental calculation can lead to confusion when talking about the differences between Margin and Mark-up.  

Terms

SP      = Sell Price – the price which we sell a product to a customer for

CoS    = Cost of Sales – for our purposes is only Material Cost

M       = Margin – how much do we factor the CoS by in order get a SP

MU     = Mark up - how much more do we want to sell for

Mark-up is the easiest to remember and is the basics of COST + %.

Formula

        SP      =      CoS + (Cos x MU)

        MU     =      (SP - CoS) / Cos

Examples

        CoS   =  R25.00
         MU   =  75%
         SP    =  ?

         SP    =   CoS + (CoS x MU)
                =    R25.00 + (R25.00 x 75%)
                =    R25.00 + R18.75
                =    R43.75


Margin is a bit more complex to initially understand and is the difference between the SP and CoS as a ratio to the CoS.
 

Formula

SP      =       CoS / ( 1 – M )

M       =       1 – ( CoS / SP )

Examples

          CoS = R25.00

            M = 75%

            SP = ??

            SP       = CoS / (1 – M)

                       

                        = R25.00 / (1 – 0.75)

                        = R25.00 / 0.25

                        = R100.00

              SP = R500.00

            CoS = R100.00

               M = ??

            M         = 1 – (CoS / SP)

                        = 1 – (R100.00 / R500.00)

                        = 1 – 0.2

                        = 0.8 (80%)

          Let’s check this example in reverse now…..

            SP       = CoS / (1-M)

                        = R100.00 / (1 – 0.8)

                        = R100.00 / 0.2

                        = R500.00

            Wow, it works out correctly !!!