How to Calculate Markup: Definition & Formula
Making calculations for markup has a specific method. Are you familiar with this? In this lesson we’ll fill you in on what markup is and teach you how to figure it out.
Background and Related Terms
On your first day as a shipping/receiving clerk at a small grocery store, the manager asks you to markup the soup cans by 30%. He rudely indicates you will be fired if it is done incorrectly. How do you keep your job?
Before we can calculate the markup on the soup cans, we have to know that the term refers to the percentage difference between wholesale cost and retail cost. For example, a can of soup with a wholesale cost to the store of $1.00 that has a 50% markup percentage will add $0.50 to the original cost of $1.00 to arrive at a price tag of $1.50. That $0.50 is how the store makes money.
Be careful to not confuse markup with gross profit or profit margin. These closely related terms use the same information we just mentioned, but they do so differently. On the can of soup, for example, the markup is 50%, leading to a retail cost of $1.50. Since the wholesale cost is $1.00, the gross profit, or price difference between the wholesale and retail cost, is 50%. So gross profit = retail cost – wholesale cost. To find the profit margin on this item, we divide the retail cost by the gross profit, which gives us $0.50/$1.50, or 33%. Confusing, I know. Be careful not to get caught in these traps!
Calculating Markup
Now that we have those definitions out of the way, let’s look at how you’d figure out markup and keep your job. In our $1.00 soup example, we could calculate the necessary markup in our heads without using a fancy formula or a calculator. How do we calculate markup and customer price if we have an item cost of $0.79 and a 30% markup? We’ll just use these processes:
Start with the formula: markup = gross profit / cost
Fill in what we know: 30% = gross profit / $0.79
Simplify the equation: .30 x $0.79 = gross profit
Solve for gross profit: $0.24 = gross profit
Add to the original cost: $0.24 + $0.79 = $1.03
And there we have it; to markup the $0.79 cent can of soup 30%, we need to add $0.24 and price it for sale at $1.03. You won’t be fired after all!
Markup Formula
Figuring out a markup follows a simple formula. Did you catch it? Markup = gross profit / wholesale cost, or m = p/c, where m = markup, p = gross profit, and c = wholesale cost.
Now let’s try a few math problems.
Markup 101
Your boss was really impressed with the markup you took care of earlier and wants to take a break while you do some more of his work. While he’s gone, he gives you some more work to help out. Take a look:
$1.95 milk, 95% markup
$2 bag of onions, 33% markup
$0.50 bottle of soda, 250% markup
Let’s do the first problem, $1.95 milk, 95% markup, together.
Start with the formula markup percentage = gross profit / cost
Fill in what we know: 95% = gross profit / $1.95
Simplify the equation: .95 * $1.95 = gross profit
Solve for gross profit: $1.85 = gross profit
Add to the original cost $1.85 + $1.95 = $3.80
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