I still remember back in the days when I was still an undergraduate student studying for my first degree in accounting how I struggled to grapple with incomplete record and single-entry bookkeeping. My struggle was simply because I was at lost when it comes to dealing with the relationship between markup and margin.
Chances are that a lot of people still have this problem and that may probably be the reason why you are reading this article on the relationship between markup and margin. Not too worry, you have come to the right place.
For the time being, store this equation somewhere in your medulla oblongata as this will form the basis of demystifying the mystery behind markup and margin relationship.
(8 + 2 = 10)
Have you done that? Ok, great let’s move on.
What is markup in ratio analysis?
When a merchant buys a particular item for
N800.00 and decides to fix his or her selling price at N1,200.00, that merchant has added N400.00 to the product. So, the markup is N400.00 while the markup ratio 50% ( N400/ N800)
Therefore, a mark-up is the amount by which the cost of a product or service has been increased to arrive at the selling price. Markup represents the relationship between the profit and the cost price of goods.
This relationship as demonstrated above is represented in percentage. The universal formula for mark-up is (Profit/Cost Price) X (100/1)
What is margin in ratio analysis?
When a merchant sells an item costing
N800.00 for N1,200, the margin on that item is 33.33% ( N400/ N1,200).
Therefore, Margin on the other hand is the difference between sales price and the cost of goods or services expressed as a percentage of selling price. This is to say that margin is the profit expressed as a percentage of selling price. The universal formula for margin is (Profit / Selling)
Relationship between markup and margin in ratio analysis
Knowing the relationship that exists between these two ratios makes some tasks in accounting easier like working with incomplete records bookkeeping and single-entry bookkeeping and managers’ commission.
I will use the below table to illustrate some common relationships between margin and markup that you will come across in your study of financial accounting and management accounting.
Now let’s expand that equation that we stated earlier. Remember the (8 + 2 = 10)? The left-hand side of the equation represents the sum of ‘Cost Price and Gross Profit’ while the right-hand side of the equation represents the ‘Selling Price’. Do not be scared, we are not going into some complex calculus calculation.
Simply substitute the figures in the equation with the numbers in the single quote to have (Cost Price + Gross Profit = Selling Price). All relationships that exists between markup and margin can be explained using the above simple equation.
Markup vs Margin Conversion Tables
Below are two tables containing examples of where markups are converted to margin and vice versa
Conversion of mark-up to margin
|1||Markup of 1/5 = 20% or 0.2||Converts to||Margin of 1/6 (1/1+5) = 16.7%|
|2||Markup of 2/5 = 40% or 0.4||Converts to||Margin of 2/7 (2/2+5) 28.6%|
|3||Markup of 5/8 = 62.5% or 0.625||Converts to||Margin of 5/13 (5/5+8) 38.46%|
Conversion of margin to markup
|1||Margin of 1/4 = 25%||Converts to||Markup of 1/3 (1/4-1) =33.3%|
|2||Margin of 1/5 = 20%||Converts to||Markup of 1/4 (1/5 -1) = 25%|
|3||Margin of 2/5 = 40%||Converts to||Markup of 2/3 (2/5 – 2) =66.67%|
You can apply the above rules to any given sets of margin or markup to convert from one to the other. Golden rule of converting from mark up to margin is that the percentage value becomes lower and when converting from margin to markup, this percentage becomes higher.
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