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Business Financial Accounting – The Difference between Mark-ups and Margins?
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Published on Tuesday, 30 June 2015 21:26
A common misconception that business (and employees) can struggle with, is the difference between mark-ups and margins. This is part of the costing of goods and services, and they are not the same.
We usually start with a cost base of quantities for materials and labor, let’s say $1000.
If we mark-up we add to the cost, let’s say 30%, then $300 is added and the sell price is $1300. But the $300 (the margin) is 23% of $1300, ((300/1300)=0.23X100=23%).
So if a manager says the margin target is 30%, just adding 30% to the cost is incorrect. To get a 30% margin on a $1300 sell price, we need to add $390 (30% is 0.3 times $1300 gives $390). But the $390 from $1300 leaves $910 cost price. And $390 is 42.8% of $910. So to work the other way, if costs are $910 the calculation to achieve 30% margin is $910 x 1.428 = $1299.48, round up to $1300.
If you wonder why you don’t get the profit you expect, sometimes this is the reason.
So check your calculations and see if your margins and mark-ups are what you were expecting.
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