How to calculate mark-up and margin

Step by step

1. Find the gross profit. Gross profit is selling price less cost of sales. Work this out first from the figures given.
2. For mark-up, divide by cost. Mark-up percentage = gross profit ÷ cost of sales × 100.
3. For margin, divide by sales. Margin percentage = gross profit ÷ revenue (selling price) × 100.
4. Convert between the two if needed. A mark-up of 25% is 1/4 of cost, so the margin is 1/5 of sales, or 20%. To go from mark-up to margin, add the top of the fraction to the bottom. To go back, subtract it.
5. Use the percentage to rebuild figures. Given sales and a margin, find gross profit and then cost of sales. This is useful in incomplete-records questions.

Worked example

Cost RM200, sold for RM250. Gross profit is RM50. Mark-up = 50 ÷ 200 = 25%. Margin = 50 ÷ 250 = 20%.

Understanding the method

Both measures describe the profit built into a selling price. Mark-up measures it against what you paid.

Margin measures it against what the customer pays. Gross profit, cost and selling price are linked: if you know any two, you can find the third.

Selling price is bigger than cost, so for the same goods the margin is always the smaller percentage. Take goods costing RM100 sold at RM125. Gross profit is RM25.

Mark-up is 25 ÷ 100 = 25%. Margin is 25 ÷ 125 = 20%.

In fractions, a mark-up of 1/4 means profit is one part for every four parts of cost. The selling price is then five parts, so the margin is 1/5. That is why you add the top of the fraction to the bottom to convert mark-up to margin, and subtract to go back.

Questions rarely give you the figure you need. Decide which base the percentage uses, and which figure is missing.

A margin of 20% on sales of RM60,000 gives gross profit of RM12,000, so cost of sales is RM48,000. A mark-up of 25% on cost of sales of RM48,000 also gives gross profit of RM12,000, so sales are RM60,000.

Here is a fuller example for a luggage shop. Every item is priced at a mark-up of one third on cost.

Opening inventory is RM12,000, purchases RM90,000 and closing inventory RM15,000. Cost of sales is 12,000 + 90,000 − 15,000 = RM87,000.

Gross profit is one third of cost: 87,000 ÷ 3 = RM29,000. Sales are 87,000 + 29,000 = RM116,000.

The margin is 29,000 ÷ 116,000 = 1/4, or 25%. So a mark-up of one third and a margin of one quarter describe the same prices.

To check, recalculate gross profit as a percentage of cost and as a percentage of sales. They should match the mark-up and margin. The margin must be lower than the mark-up.

If it is higher, you used the wrong base. Gross profit plus cost of sales must also equal sales.

Common mistakes: using purchases instead of cost of sales, and converting fractions the wrong way (a mark-up of 1/4 becomes a margin of 1/5, not 1/3). Another is assuming a constant mark-up in incomplete-records questions when some goods were sold at a reduced price or taken as drawings. Adjust for those goods separately.

If mark-up and margin questions keep giving you the wrong answer, one of our teachers can practise the cost-or-sales check with you until choosing the base is automatic. Book a trial class

Related skills

• How to prepare an income statement for a sole trader
• How to prepare accounts from incomplete records
• How to calculate cost of sales

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.