The profit markup is usually calculated by companies for different groups of goods, so that they know how much they need to add to the selling price in order to make a profit on the sale of their products and not just cover costs. In this article we will show you how to calculate the profit markup in the manufacturing and retail sectors using some examples.
Calculate profit markup with formula
The profit markup is calculated by adding a certain percentage to the cost of goods sold. Included in the cost of goods sold are all costs incurred for the production and distribution of a product.
To ensure that a company not only covers its costs but also makes a profit on the sale of the product, the profit markup must be added to the cost price to determine the actual selling price. The formula for the profit markup then looks like this:
Profit markup = Cost price x profit markup rate.
This calculates the selling price of the product:
Sales price = Cost of goods sold + profit markup
Calculate profit markup with example
A snack bar operator sells French fries. The cost price of a portion is 1,50€. This includes the price of the fries, the frying fat, the store rent, electricity and all other operating costs. The snack bar operator calculates with a profit markup rate of 10%. That is, he wants to make 10% profit on the sale of a portion of fries.
First you calculate the profit markup:
Profit markup = 1,50€ x 0.1 = 0,15€.
So on top of the cost price he has to add a profit markup of 15 cents to reach his profit target. The selling price of a portion of fries is then:
Net selling price = 1,50€ + 0,15€ = 1,65€.
This sales price is only the net sales price. One must still add the value added tax of 7%. (The reduced tax rate applies if the food is consumed at bar tables or a counter; 19% would have to be charged if there were seating in the snack bar). With the reduced tax rate of 7%, the gross sales price is then:
Gross selling price = 1,65€ + 0,12€ = 1,77€.
The portion of fries must therefore be offered to the guests at 1.77€ so that the snack bar operator makes 10% profit on the sale of the fries.
Calculate profit surcharge in retail trade
The profit markup is usually calculated only in companies that manufacture products themselves. In retail companies, instead of the profit markup, one speaks of the trade margin, and instead of the cost price, one speaks of the purchase price. The markup is then calculated as the difference between the net sales price and the purchase price. Expressed in a formula, it looks like this:
Trade Margin = Net Sales Price - Purchase Price.
Example
If a company sells T-shirts, it sets a markup to indicate how much profit per T-shirt should be made. If the purchase price of the T-shirt is 10€ and a profit of 10% is to be made, the margin is calculated as follows:
Margin = 10€ x 0.1 = 1€.
This then gives the net selling price:
Net selling price = 10€ + 1€ = 11€.
To this must be added 19% VAT:
Gross sales price = 11€ + 2.09€ = 13.09€.
The T-shirt must therefore be offered for sale to the end customer at a price of 13.09€ in order for the company to achieve the estimated profit.
Calculate profit markup in the P&L
It is important to note that the profit markup in itself says nothing about whether a company actually makes a profit on the sale of its products. Depending on what is or is not included in the cost price, the bottom line may be a loss despite the profit markup because the company is not covering its costs.
Some types of costs are not included in the cost price. These can be, for example, financing costs, non-operating expenses or income taxes.
In the above example of the snack bar owner, extraordinary expenses may have been incurred because the kiosk was once flooded after a storm. The repair costs are extraordinary expenses that are not included in the cost price but do affect profit.
So whether a company is actually making a profit cannot be said by just calculating the profit markup. You can only judge this after you have carried out a profit and loss statement (P&L). In this statement, all costs and revenues are compared with each other, so that it is only there that you can see whether the bottom line is a profit or a loss.
Calculate profit markup with formula
The profit markup is calculated by adding a certain percentage to the cost of goods sold. Included in the cost of goods sold are all costs incurred for the production and distribution of a product.
To ensure that a company not only covers its costs but also makes a profit on the sale of the product, the profit markup must be added to the cost price to determine the actual selling price. The formula for the profit markup then looks like this:
Profit markup = Cost price x profit markup rate.
This calculates the selling price of the product:
Sales price = Cost of goods sold + profit markup
Calculate profit markup with example
A snack bar operator sells French fries. The cost price of a portion is 1,50€. This includes the price of the fries, the frying fat, the store rent, electricity and all other operating costs. The snack bar operator calculates with a profit markup rate of 10%. That is, he wants to make 10% profit on the sale of a portion of fries.
First you calculate the profit markup:
Profit markup = 1,50€ x 0.1 = 0,15€.
So on top of the cost price he has to add a profit markup of 15 cents to reach his profit target. The selling price of a portion of fries is then:
Net selling price = 1,50€ + 0,15€ = 1,65€.
This sales price is only the net sales price. One must still add the value added tax of 7%. (The reduced tax rate applies if the food is consumed at bar tables or a counter; 19% would have to be charged if there were seating in the snack bar). With the reduced tax rate of 7%, the gross sales price is then:
Gross selling price = 1,65€ + 0,12€ = 1,77€.
The portion of fries must therefore be offered to the guests at 1.77€ so that the snack bar operator makes 10% profit on the sale of the fries.
Calculate profit surcharge in retail trade
The profit markup is usually calculated only in companies that manufacture products themselves. In retail companies, instead of the profit markup, one speaks of the trade margin, and instead of the cost price, one speaks of the purchase price. The markup is then calculated as the difference between the net sales price and the purchase price. Expressed in a formula, it looks like this:
Trade Margin = Net Sales Price - Purchase Price.
Example
If a company sells T-shirts, it sets a markup to indicate how much profit per T-shirt should be made. If the purchase price of the T-shirt is 10€ and a profit of 10% is to be made, the margin is calculated as follows:
Margin = 10€ x 0.1 = 1€.
This then gives the net selling price:
Net selling price = 10€ + 1€ = 11€.
To this must be added 19% VAT:
Gross sales price = 11€ + 2.09€ = 13.09€.
The T-shirt must therefore be offered for sale to the end customer at a price of 13.09€ in order for the company to achieve the estimated profit.
Calculate profit markup in the P&L
It is important to note that the profit markup in itself says nothing about whether a company actually makes a profit on the sale of its products. Depending on what is or is not included in the cost price, the bottom line may be a loss despite the profit markup because the company is not covering its costs.
Some types of costs are not included in the cost price. These can be, for example, financing costs, non-operating expenses or income taxes.
In the above example of the snack bar owner, extraordinary expenses may have been incurred because the kiosk was once flooded after a storm. The repair costs are extraordinary expenses that are not included in the cost price but do affect profit.
So whether a company is actually making a profit cannot be said by just calculating the profit markup. You can only judge this after you have carried out a profit and loss statement (P&L). In this statement, all costs and revenues are compared with each other, so that it is only there that you can see whether the bottom line is a profit or a loss.