Contents

# Markup|Definition & Meaning

**Definition**

In business economics,Â **markup**Â refers to theÂ **amountÂ **added to a product or service’s **cost price**.Â It is commonly presented as a **percentage over cost. **The concept of markup is **significant** in business as a seller would be unable to cover **overheads** or **make a profit**.

## Significance of Markup

A **markup** is an amount by which you **raise** the price. It suggests that you paid a certain price for it, and depending on how much you **bump it up**, you will sell it for a **larger price**. From a laymanâ€™s perspective, **profit** or **margin** is commonly referred to by these terms.

The retailer’s **profit** from each unit of the goods is determined by the **markup** he is permitted to use. If the **markup** is **higher**, the buyer will pay more and the seller will make **more money**.

The **markup** is usually computed as a **percentage**. **Markup** is vital for any business to make any **profit** or simply survive. Consumers sometimes complain about higher percentage **markup** on some products or services. For example in movie theaters, there is a massive **markup** on popcorn, beverages, and other edibles.

**Markup** is the value to include in prices in order to increase **profit**. It is described in percentage form. Many businesses consider their **prices** by calculating the **cost** of providing their goods and services, then adding a percentage to that cost. The amount of **money** you earn on each **sale** depends on your **markup**

When you bring **markup** pricing into account, it can assist you in determining **competitive prices** for your products and services that will enable your company to turn a **profit**. If you increase the prices of your products and services sufficiently, you can help cover any production-related costs.

**Markup** indicates the difference between the **selling price** and the item’s cost to the business. In general, a business generates more money if the markup is **higher**. The retail price of a product less its cost is known as markup.

## Application of Markup

The concept of **markup** is widely used in **management accounting** while calculating costing and pricing. There are various ways in which the concept of markup can be used.

Making a **profit** is every company’s primary purpose. Choosing a product’s **selling price** is one way to accomplish that goal using **markup** or cost-plus pricing. Businesses must markup their goods and services by a certain amount to **break even** and cover their manufacturing costs.

**Markup** pricing is the best pricing approach to use if you need to **quickly** and **accurately** establish **prices** for a variety of products. This method is practical in some situations due to its relative **simplicity** and **scalability**.

**Safe Markup Percentage**

Although there is no predetermined “optimal” **markup** rate, most businesses choose a markup of **50%**. A 50% markup, also referred to as a **keystone markup** denotes a price that is 50% greater than the value of the product or service.

For example, if there is a markup of **50%** on an item whose **cost price** is **$20**, then the percentage would be **50% of $20** which equals **$10**. Hence, the selling price of that item should be **20 + 10 = $30**.

It is safe to charge a markup of **50%** for your goods or services because this guarantees that you will make enough money to cover manufacturing costs as well as generate a **profit**. If the **margins** are too **thin**, you might barely **break even** after manufacturing expenses.

Food is often marked up around **60%** in the restaurant business, but only around **15%** in the retail grocery sector.

**Difference Between Markup and Margin**

**Markup** can often be confused with **margin **since both of them refer to the profit that is generated. Accounting and sales problems may result from confusing markup with profit margin. As an illustration, you can wind up either underpricing or overpricing your goods, which might reduce your profits.

It is crucial to comprehend the two concepts to determine whether you are properly pricing your products. There is one big difference between them. **Markup** is the value attained by dividing profit by **cost price**.

Markup = Profit/Cost price * 100

While **margin **can be defined as profit divided by the **selling price**.

Margin = Profit/Sell price * 100

These are two alternative ways to calculate your **profit** from a **sale**. The amount of money that separates your **buying** and **selling** prices is the same for both of them. And they both use a **percentage** to indicate that sum. Even though they both refer to the exact same amount of money, your **markup** is always **more** than your **margin**.

## Examples Explaining the Concept of Markup

### Example 1

Johnny bought 10 shirts for **$200**. He makes a profit of **$13** on each shirt after selling them. Calculate the markup rate on a single shirt.

### Solution

To solve this problem, let us write the data that is given to us as follows:

Price of 10 shirts = $200

Price of a single shirt = 200/10 = $20

Profit on each shirt = $13

Now as we know:

Markup rate = Profit/Cost Price x 100

So putting the values in the equation, we get:

Markup rate = 13/20 x 100 = 65%

**Example 2**

A bookstore pays its wholesaler **$45** for some limited edition copies of a famous novel and sells them for **$65**. Determine the markup rate.

**Solution**

Let us write the data for the problem statement as follows:

Cost price = $45

Selling price = $65

Profit = 65 – 45 = $20

Now, as we know:

Markup rate = Profit/Cost Price x 100

So putting the values in the equation, we get:

Markup rate = 20/45 x 100 = 44.4%

**Example 3 **

Felton purchases a game for his console for **$60**. After finishing the game, he resells it at a markup rate of 37.5%. Calculate the selling price.

**Solution**

Let us write the data for the problem statement as follows:

Cost price = $60

Markup rate = 37.5%

As we can see, we have to find the selling price as the markup rate and cost price are given.

For that purpose, we will perform the following calculation:

**37.5%** of **$60** = **$22.5**

Selling price = 60 + 22.5 = $82.5