Mark-up and margin: practice questions

How to approach these questions

Fix the definitions before you touch the numbers. Mark-up is profit as a fraction or percentage of cost price, so the base is cost of sales. Margin is profit as a fraction or percentage of selling price, so the base is sales.

The whole topic rests on knowing which figure goes on the bottom of the fraction. So first identify whether you are given a mark-up or a margin, which tells you whether cost or sales is your starting point.

Underline the word used in the question. Reading margin as mark-up, or the reverse, sends every later figure wrong.

The most useful technique is a three-line frame: cost, profit and sales. Slot the known figure in. If the mark-up is 25%, then cost is 100, profit is 25 and sales are 125.

The ratio of cost to sales is 100 to 125, or 4 to 5. If the margin is 25%, then sales are 100, profit is 25 and cost is 75. The ratio of cost to sales is 75 to 100, or 3 to 4.

Writing out the frame before you calculate shows the examiner your method and checks your direction. Convert between the two when it helps. A mark-up of one quarter is a margin of one fifth.

A margin of one quarter is a mark-up of one third. The profit is the same amount, measured against different bases.

Work in the order the trading account flows, because most of these questions are a trading account with a gap in it. Sales less cost of sales equals gross profit. Cost of sales is opening inventory plus purchases less closing inventory.

Decide which figures you have and which you must find, then use the mark-up or margin to bridge the gap. For example, sales are RM60,000 and the margin is 30%. Gross profit is RM18,000 and cost of sales is RM42,000.

If you are told instead that cost of sales is RM42,000 and the mark-up is 25%, gross profit is RM10,500 and sales are RM52,500. Lay out each step as a labelled line, so part marks are available even if one figure slips.

These ratios are also the standard tool for estimating missing figures in incomplete records, and for spotting inventory loss or theft. Expect a scenario with a fire, flood or stolen goods. Use the mark-up or margin to find the expected cost of sales.

Then rearrange the cost of sales equation to find the missing item, usually closing inventory. If expected closing inventory is RM8,000 but only RM3,000 was saved, the loss is RM5,000.

State what the balancing figure represents. The marks are for interpreting the number, not just producing it.

Check your answer by feeding it back through the definition. If you found sales using a margin, recompute the margin from your gross profit and sales. It should return the percentage you were given.

Next, check direction. For a profit-making trader, sales must be higher than cost of sales.

If your cost comes out higher than sales, you probably divided by the wrong base. Do not round too early, because a rounded intermediate result can throw the final answer out.

Marks are mostly lost on three points. Applying the percentage to the wrong base is the first. Mixing mark-up and margin in one question is the second.

Treating gross profit and net profit as the same is the third. Mark-up and margin work on gross profit only, before expenses.

Finally, confirm the closing inventory used in the cost of sales equation. A value from the wrong period distorts the base.

If you often pick the wrong base, we can help. One of our teachers can work through a set of mark-up and margin questions with you until the three-line frame becomes automatic. Book a trial class