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.

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%

• To convert from markup to profit margin:

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

• Cost-plus pricing
• Marketing
• Pricing

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.