Introduction to Markup and Examples

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The primary purpose of operating a business is to generate profits. A business engaged in merchandising needs to establish a regular selling price (S).

Regular selling price must cover:

1) The cost of buying the goods
2) The operating expenses (or overhead) of the business
3) The desired profit required by the owner to stay in business

Therefore:

Regular Selling Price (S)=Cost of Buying (C)+(Expenses (E)+ Net Profit (P))

Or simply: S=C+E+P

Sometimes it is appropriate to group expenses (E) and desired profit (P) together when determining a selling price. This combined amount is often referred to as a markup.
• Markup (M) = Expenses (E) + Net Profit (P)
○ M=E+P

Think of "markup" as the total amount you add to your cost, not just to make a profit, but to also cover all the expenses it takes to run your business. So, you're not just "marking up" the selling price to make a profit, but also to survive and thrive.

Now, substituting M back into the regular selling price formula, we get:

(Regular Selling Price (S)=Cost of Buying (C)+Markup (M))

Or simply: S=C+M

The rate of markup (R) may be stated in one of two ways:

1. As a percent of cost
→ That is, your cost (C) acts as the base and markup is the portion
R_C=(S−C)/C⇒( M )/C×100%
R_C tells you the percent needed to add to the cost to cover expenses and make a profit

2. As a percent of selling price
→ That is, your selling price (S) acts as the base and markup is the portion
R_S=(S−C)/S⇒( M )/S×100%
R_S tells you what percent of the final selling price is made up of markup

Given C=$72.00, S=$96.00, and E=(15%)S

a) Find the amount of markup (M)
Note: There are many formulas that represent markup; based on the data given, you will have to distinguish which one to use. Here are a couple we've discussed already. Which one is best?
• Markup (M)=Expenses (E)+Net Profit (P)
• Markup (M)=Selling Price (S)−Cost of Buying (C)
b) Find the amount of overhead (E)
Recall: Overhead means your "expenses"
c) Find the profit or loss (P) realized on the sale
Recall: Markup (M) = Expenses (E) + Net Profit (P) → Rearrange for P
d) Calculate rate of markup based on cost.
Recall:
• Base × Rate = Portion
• The rate is based on the cost; hence, cost is the base and markup represents a portion of it
e) Calculate rate of markup based on selling price.
Recall: Base × Rate = Portion