Markup (business)

Markup (business)

Markup is the difference between the cost of a good or service and its selling price.[1] A markup is added on to the total cost incurred by the producer of a good or service in order to create a profit. The total cost reflects the total amount of both fixed and variable expenses to produce and distribute a product.[2] Markup can be expressed as a fixed amount or as a percentage of the total cost or selling price.[1] Retail markup is commonly calculated as the difference between wholesale price and retail price, as a percentage of wholesale. Other methods are also used.

Contents

Price determination

Markup as a fixed amount

  • Assume: Sale price = $2500, Product cost is $2000
Markup = Sale price - Cost
$500 = $2500 - $2000
  • Assume the actual sale price was $2200
Markdown = List price - Sale price
$300 = $2500 - $2200
Initial Markup = List price - Cost
$500 = $2500 - $2000
Maintained Markup = Sale price - Cost
$200 = $2200 - $2000

Markup as a percentage

  • Cost x (Markup + 1) = Sale price
or solved for Markup = (Sale price / Cost) - 1
  • Assume the sale price is $1.99 and the cost is $1.40
Markup = ($1.99 / 1.40) - 1 = 42%
Sale price - Cost = Sale price x Profit margin
Margin = 1 - (1 / (Markup + 1))
or Margin= Markup/(Markup + 1)
Margin = 1 - (1 / (1 + .42)) = 29.5%

Aggregate supply framework

P = (1+μ) W. Where μ is the markup over costs. This is the price setting equation

W = F(u,z) Pe . This is the wage setting relation. u is unemployment which negatively affects wages and z the catch all variable positively affects wages.

Sub the wage setting into the price setting to get the aggregate supply curve.

P = Pe(1+μ) F(u,z). This is the aggregate supply curve. Where the price is determined by expected price, unemployment and z the catch all variable.

See also

References

  1. ^ a b Ingels, Jack (2009). Ornamental Horticulture: Science, Operations, & Management. Cengage Learning. pp. 601. ISBN 9781435498167. http://books.google.com/books?id=iv6SKu85cIUC&pg=PA601&dq=#v=onepage&q&f=false. 
  2. ^ Pradhan, Swapna (2007). Retailing Management. Tata McGraw-Hill. ISBN 9780070620209. 

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