In everyday language and every day, we often use simplifications. This creates ambiguities within the meaning of some very similar terms. This is also the case with margin and markup. We intuitively know and understand that this is the difference between the selling price and the purchase price (or the cost of producing the product), i.e. the profit from the sale. In both cases.
It is true that the margin is equal to the mark-up as to the value in currency (PLN) – the difference between the sale price and the purchase price. Most often, however, both the margin and mark-up are given as a percentage (%). These quantities (expressed as a percentage) are no longer equal. Why? Because they are calculated differently.
What is the margin?
The margin is the profit (gross) from the sale, and therefore the unit profit margin is the difference between the price and the cost of the commodity. The profit margin is calculated using the formula:
margin [%] = profit [PLN] / sales price [PLN] = (sale price [PLN] – purchase cost [PLN]) / sale price [PLN]
The profit margin is calculated by the seller when he wants to know what part of the sales revenue is his “profit”:
profit [PLN] = margin [%] * sales price [PLN]
In fact, this is not a real net profit – it is an amount that includes the amount to cover fixed costs, and only a possible surplus is a profit. Therefore, the profit margin is also called the margin to cover (fixed costs).
Knowledge of the margin is needed to determine the break-even point of sales.
What is overhead?
The overhead is the amount by which the purchase price of the goods was increased to determine the sale price. The overhead is calculated using the formula:
overhead [%] = sale price [PLN] / purchase cost [PLN] – 100% = (sale price [PLN] – purchase cost [PLN]) / purchase cost [PLN]
The markup is most often used by the seller to determine the sale
price : sales price [PLN] = purchase cost + purchase cost [PLN] * overhead [%] = purchase cost * (100% + markup [%])
What is the relationship between margin and markup?
How to calculate the margin, knowing the markup? How to calculate the markup, knowing the margin? The relationship between margin and margin can be calculated using the following formulas:
Margin [%] = overhead [%] / (overhead [%] + 100 [%])
Overhead [%] = margin [%] / (100% – margin [%]) )