Mark-up or Margin?

These are often used when dealing with missing items in the trading section of the profit and loss account, i.e. sales, cost of sales (or elements making up that figure) and gross profit.

Mark-up

Mark-up is the percentage added to the cost of a sale to calculate the selling price.

Example

If cost of sales is £100 and the mark up on cost of sales is 50% then our selling price will be £100 + 50% = £150.

Using a basic proforma you can calculate any missing item from the trading account as long as you are given your mark-up percentage.

	£	%	£	%
Sales	X	100 + Mark-up	150	150
Cost of sales	X	100	100	100
Gross profit	X	Mark-up	50	50

By using this proforma, you can now work out sales, cost of sales or profit if you are given the mark-up percentage.

Example

You are told that Dewi made sales totalling £125,000 with a mark-up on cost of sales of 25%. What is the cost of sales and the gross profit?

	£	%	£	%
Sales	X	100 + Mark-up	125,000	125
Cost of sales	X	100	100,000	100
Gross profit	X	Mark-up	25,000	25

Margin

Shows in percentage terms the amount of profit generated from sales i.e. what percentage of the sales revenue eventually ends up as gross profit.

E.g. if sales are £150 and the margin is 50% then the gross profit would be £150 x 50% = £75

Using a basic proforma you can calculate any missing item from the trading account as long as you are given your margin percentage.

E.g. if cost of sales where £75,000 and there is a margin of 25% what would the

sales and the gross profit be

	£	%	£	%
Sales	X	100	100,000	100
Cost of sales	X	100 - Margin	75,0000	75
Gross profit	X	Margin	25,000	25

Notice the difference in Sales value between this and the example of Dewi (above).

Example

Siân had sales of £200,000 with a margin of 30%. What is the cost of sales?

	£	%	£	%
Sales	X	100	200,000	100
Cost of sales	X	100 - Margin	140,000	70
Gross profit	X	Margin	60,000	30

Hopefully this makes things a little easier to understand. You can use this 'grid' format to help answer any margin task. 

Remember, sometimes you will have to calculate profit or cost of sales before you can go on and calculate purchases or opening/closing inventory.

Example

 J Jackson is a trader who marks the selling price of his goods at 25% above cost. His books give the following information at 31st July 20X4.

Inventory at 1/8/X3 £4,936, Inventory at 31/7/X4 £6,310,

Sales for the year £30,000

Find:

a) the cost of goods sold,

Here the Sales figure and mark-up (25% above cost) is given so we can calculate the missing figures in the grid

	£	%	£	%
Sales	X	100 + Mark-up	30,000	125
Cost of sales	X	100	24,000	100
Gross profit	X	Mark-up	6,000	25

S0, cost of goods sold is £24,000

b) value of purchases during the year, and

Here we can use an extract from the profit and loss account to help us:

Opening inventory        £  4,936

Purchases                       £

less closing inventory    £  6,310

Cost of sales                  £ 24,000

We can work backwards here: £24,000 + £6,310 - £4,936 = £25,374

Check

Opening inventory        £  4,936

Purchases                       £25,374

less closing inventory    £  6,310

Cost of sales                  £ 24,000

c) profit made by Jackson

Sales - cost of sales

£30,000 - £24,000 = £6,000 (Which agrees with our calculation in the grid!)