MARKUP VALUE: BY ER. AVINASH KULKARNI

Saturday Brain Storming Thought (193) 21/10/2023

MARKUP VALUE

Markup Value shows how much more a company’s selling price is than the amount the items costs the company

In general, the higher the markup, the more revenue a company makes

Markup is the retail price for a product minus its cost, but the margin percentage is calculated differently

The value added is called the markup

Markup Percentage

Markup Percentage is a concept commonly used in managerial/cost accounting work and is equal to the difference between the selling price and cost of a good, divided by the cost of that good

Markup % = (Selling Price/Cost) / (Cost) X 100

Markup Percentage example

Selling Price : Rs 500
Cost of Purchase : Rs 400

Markup Value : Rs 100

Markup Percentage : (100/400) = 25%

Markup and Discount

When a store sells an item for more than it paid, the extra money is used to cover expenses, and to make a profit

The increase in price is called markup

The percent of markup is a percent of increase

The amount the customer pays is called selling price

When astore has a sale, the amount by which the regular price is reduced is called discount

The percent of discount is a percent of decrease

The total cost of an item is the price plus the sales tax

Distinction between markup and discount

A markup is a value added to the cost price of goods to cover operating costs and to add profit

Discount is s reduction in the catalogue price (or its price)

Markup includes

Acquisition cost
Overhead expenses
Selling cost
General expenses
Administrative costs
Profit margin

Markup Price

Markup pricing is the method of adding a certain percentage of markup to the cost price of the product to estimate the selling price of a product

Markup pricing example

Assumptions

1) Variable cost per unit : Rs 30

2) Fixed cost : Rs 500000

3) Expected Unit Sales : Rs 50000

4) the unit cost = (variable cost) + (fixed cost/Unit Sales)

= (30) + (500000/50000)
= Rs 40

5) Add 20% markup on sales

6) Markup price = (unit cost) / (1 – desired return on a product)

= (40) / (1 – 0.20)
= Rs 50

Markup and Margin

Margin is equal to sales minus costs of goods sold

Markup is equal to a products selling price minus its cost price

Advantages of Markup

1) Simplicity : it’s a simple and straightforward method that doesn’t require detailed market reasearch or complex calculations

2) Ensures Profitability : since the Markup includes a profit margin, every sales contributes to the profitability of the business

3) Markup enables sellers to build a profit margin into their pricing, preventing losses that could stymie business cash flow and growth

Disadvantages of Markup

1) Markup may not account for market fluctuations or changes in customer demand

2) in some cases, using a fixed markup Percentage may result in over or under pricing of products, impacting sales and profitability

3) if company switch suppliers or get cheaper material, costs will be lower, which lowers selling price, ie even though consumers are willing to pay more, company missing out on revenue

Negative Markup

Markup and margin can be negative when selling below cost

Impact of high Markup

If markup is high, price becomes high, then customers choose to buy the same product at a lower price from astore down the street,

Company’s overall profit margin will decline because of fewer sales

Priority between margin and markup

1) If you are interested in calculating business profits, it’s best to use margin over markup, because margin also provides a better overall view of the profitability

2) If you wants to decide on the right selling price to achieve a certain profit, you should use the markup percentage

Markup Pricing behaviour

At the profit maximizing price, marginal revenue equals marginal cost

Markup is the difference between price and marginal cost, as a percentage of marginal cost

The more elastic the demand curve faced by a firm, the smaller the markup

Zero Markup

Zero Markup usually mean zero markups on rates provided by payment network or partner banks and not on interbank rates, which are live or real time rates