10.3 and 3.1 How to Calculate Inventory Selling Price by Margin and Markup
Problem
In Fees Update for Inventory, what is the difference between Inventory - Average Cost Markup and Inventory - Average Cost Margin and how do you determine the formula?
Solution
In retail accounting, there is a distinction made between 'Markup' and 'Margin.'
'Markup' is the amount of increase in price over cost to calculate profit. If your cost is $1.00, and the base retail price (before tax) is $1.20, the markup is $0.20, or 20%.
'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 (pre-tax) profit margin of 20%, you must make sure that the cost is 80% of the final (pre-tax) 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.
Refer to Calculating Markup and Margin for examples and formulas used to calculate both.