Profit Margin and Percentage Markup

Date: 02/16/2007 at 05:39:18
From: Evelyn
Subject: Profit margin and markup

I have a small business and need to be able to compute profit margins
and percentage increases.  There seems to be a difference of
"semantics" when I try to discuss this with customers.  

Specifically, suppose I have an item that my customer can buy at the
wholesale price of $60.00, and then they can sell it at the retail
price of $125.00.  What is the percentage mark-up and is this a
different number than what they would consider their profit margin?

I believe to find the increase I would just take 60 divided by 125
which would equal .48 which would mean a 48% increase on price.  Is
this also considered the profit margin?  I don't think so!  I could
say to the client that they have made a profit of what percent?

Date: 02/16/2007 at 07:58:02
From: Doctor Ian
Subject: Re: Profit margin and markup

Hi Evelyn,

Here are a couple of nice definitions for those terms, with examples:

    http://www.ebatesville.com/library/june_16_04.htm 

Following these definitions, 

                        gross profit
  gross profit margin = ------------
                          sales

                        125 - 60
                      = --------
                          125

                         65
                      = ---
                        125


                      = 0.52 
     
or 52 percent.  And


           sales price - cost
  markup = ------------------
                  cost


           125 - 60
         = --------
              60

           65
         = --
           60

         = 1.08

or 108 percent.

The difference is what you're comparing the profit to:  If you express
the profit as a percentage of the sale price, you're computing the
profit margin.  If you express the profit as a percentage of the cost,
you're computing the markup. 

Does that make sense?  Let me know if you need more help.

- Doctor Ian, The Math Forum
  http://mathforum.org/dr.math/ 

Date: 02/16/2007 at 10:08:14
From: Evelyn
Subject: Thank you (Profit margin and markup)

You are awesome!!!!  Thank you so much.  You made this perfectly
clear.  It's a bit embarrassing that I don't remember this, but I've
not really needed to use it until now.  Thanks again!