Question

write data for 6 slides the topic.
#calculate gross margin and markup on inventory cost. which could include data for gross profit margin and markup on inventory cost.

Answer 1

To calculate percentage, use this markup formula:

Markup percentage = (price – COGS) / COGS

Now let’s look at a hypothetical example to put the markup price formula to work:

You sell clothing and accessories at your store. For the sock product that you carry, you’ve calculated that the COGS is $5/pair. Customers can buy these socks for $15/pair. Here’s how to do the calculation using the markup formula:

Price = $15

COGS = $5

$15 – $5 = $10

The markup is $10. To calculate the markup ratio:

($15 – $5) / $5 = $10 / $5 = 2

That means that the markup ratio was 2:1. In other words, the markup was 200%. You marked up the price of the socks by 200%.

Using the percentage is valuable because this guarantees a certain level of profit, regardless of fluctuations in production costs.

For instance, let’s say you always mark up the socks by $10. The COGS goes up significantly; it’s now $15 to produce a pair of socks. You sell them for $25, a 40% markup. You’re still making $10/pair, but your profit margin has decreased. If you used a fixed markup of 200%, you’d sell the socks for $45/pair, increasing your profit margin.

And that segues us into the next section: the margin formula.

Margin formula

To calculate margin, use this formula:

Margin = price – COGS

To calculate margin as a ratio to then get a percentage, use this formula:

Margin = (price – COGS) / price

Let’s look at our example again. For the socks with $5 COGS that go for sale at $15/pair, you’d calculate the following:

Price = $15

COGS = $5

$15 – $5 = $10

Your gross profit margin is $10/sale. To get the margin as a percentage, which is more useful, you’d do the following:

($15 – $5) / $15 = $10 / $15 = 0.67

The gross profit margin ratio is 0.67, and the gross profit margin is 67%. Note how the $ amount for the markup and margin were the same, yet the percentage is different. This is another example of how the percentage is more insightful.

Remember how our COGS changed to $15/pair? When you sell them for $25/pair, the margin is 40%. But when you sell them for $45/pair, the margin is 67%. Keeping a fixed markup as a percentage can help you keep consistent profit margins —

Markup is perfect for helping ensure that revenue is being generated on each sale. Markup is good for getting started because, as you are getting things set up, you are keenly aware of the costs for your business, and you’re still learning about the kind of revenue you can bring in through sales.

As you get to know your business better and you start to look at reports on your sales, margin can be helpful for examining how much actual profit you’re making on each sale.