10.3 and 3.1 What is the Difference between Margin and Markup with POS Inventory Fees?
Problem
POS Inventory allows for fees based on Margin and Markup. What is the difference between Markup and Margin? Are the terms interchangeable?
Solution
In accounting, there is a distinction made between 'Markup' and 'Margin.'
Markup
'Markup' is the amount of increase in price over cost to calculate profit. If your cost is $1.00, and the retail price is $1.20, the markup is $0.20, or 20%. Because you are providing the percentage markup, you specify the profit. In the example above, the profit is $0.20, which is 1/5 (20%) of the cost where Profit/Cost=Percentage Markup (.2/1.00=.2).
When you know your markup percentage, you easily can find your selling price by adding the amount of the original cost to the amount of the markup with the following formula: Selling Price = Original Cost + (Original Cost * Markup Percentage).
For Example: Your cost for an inventory item is $4.00. You wish to 'mark it up' by 50%. To find your selling price using the formula above: Selling Price = 4.00 + (4.00 * .50). Selling Price = 4.00 + 2.00. Selling Price = $6.00.
Margin
'Margin' is a fixed percentage profit based on the final selling price. If your cost is $1.00, and you specify that you must have a final profit margin of 20%, you must make sure that the cost is 80% of the final selling price because 100% of selling price less 20% profit margin leaves 80% for cost. In this scenario, $1.00 is 80% of $1.25. Selling for $1.25 retains the 20% profit margin.
The formula used to calculate the required selling price, to preserve a margin based on the final cost is: Selling Price = Cost/(1.00-Margin Percentage).
For Example: Your cost for an inventory item is $4.00. You want a 40% profit margin on the sale. This means your $4.00 cost must be 60% of the total selling price (100% of selling price less 40% profit margin leaves 60% for cost). To find your selling price using the formula above: Selling Price = 4.00/(1.00 - .40). Selling Price = 4.00/.60. Selling Price = $6.66.
Alternately, you could set your final selling price first and then calculate the profit margin. The formula you would use to calculate the profit margin, based on a final selling price is: Margin = 1.00-(Cost/Selling Price).
For Example: Your cost for an inventory item is $4.00. You want to sell it for $6.00, thus making a $2.00 profit per sale. Margin = 1.00 - (4.00/6.00). Margin = 1.00 - .666. Margin = .334.