Often I hear small business people talk about margin when what they mean is mark up. Because they misunderstand the difference they often do not understand why they have less money coming to the bottom line than they planned.
Markup if the percentage added to the cost of the product for overhead, sales and profit. For example, if you buy a widget for $100 and add twenty-five percent for overhead and profit the cost of the item will be $125. The markup is 25%.
The Margin is the overhead and profit divided by the total sale price, in the example above the gross margin is $125/25 or 20%. I you prepared you budget for sales at $1,250,000 and marked up your cost by 20% you would wind with one-fifth less to spend on overhead and profit.
Margin is often used interchangeably with Gross Margin. Gross margin is the difference between income and the direct cost of goods sold before deducting overhead and cost of sales.
This table illustrates the shortfall you can experience it you only consider Markup.
Cost of Goods sold | Markup % | Markup $ | sell price | Margin % | variance |
$ 300,000.00 | 10% | 30000 | 330000 | 9% | 1% |
$ 500,000.00 | 20% | 100000 | 600000 | 17% | 3% |
$ 750,000.00 | 25% | 187500 | 937500 | 20% | 5% |
$1,000,000.00 | 33% | 330000 | 1330000 | 25% | 8% |
Original content copyright 2010 Thomas Robinson
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