Markup and margin: if you add a 25 percent markup, why does your profit come out at 20 percent of the price?
Markup is calculated on cost, while margin is calculated on the selling price. Not knowing the difference can push a shop into a loss when it announces a discount. Formulas, a table and the entries in account 2980.
Gulnoza opened a clothing shop. She bought a shirt for 400 000 soum, added a 25 percent markup and sold it for 500 000 soum. At the end of the month her analyst friend said: "Your margin is 20 percent." Gulnoza was puzzled: "But I added 25 percent, didn't I?"
Both of them are right. They are simply dividing the same profit by two different things.
What is the difference between markup and margin?
- Markup divides the profit by the cost: 100 000 / 400 000 = 25%
- Margin divides the profit by the selling price: 100 000 / 500 000 = 20%
In both cases the profit is 100 000 soum. But because the selling price is larger than the cost, the margin always comes out smaller than the markup.
Conversion formulas (u is markup, m is margin, expressed as fractions): - margin = u / (1 + u) - markup = m / (1 − m)
| Markup | Margin | Calculation |
|---|---|---|
| 20% | 16.67% | 0.20 / 1.20 |
| 25% | 20% | 0.25 / 1.25 |
| 33.33% | 25% | 0.3333 / 1.3333 |
| 50% | 33.33% | 0.50 / 1.50 |
| 100% | 50% | 1.00 / 2.00 |
The reverse question: if Gulnoza wants a 30 percent margin to remain in the price, what markup should she add? 0.30 / 0.70 = 42.86%. The shirt will cost 400 000 × 1.4286 ≈ 571 440 soum, the profit is 171 440 soum, which is almost 30 percent of the price.
What happens when a discount is announced?
This is where not knowing the difference becomes expensive. Gulnoza thought: "My markup is 25 percent, so even if I give a 20 percent discount I'm still in profit."
| Discount | New price | Profit per item | Margin on price |
|---|---|---|---|
| 0% | 500 000 | 100 000 | 20% |
| 10% | 450 000 | 50 000 | 11.11% |
| 20% | 400 000 | 0 | 0% |
A 20 percent discount eats up the markup completely: the price falls to cost. That is because the discount is taken not from the cost but from a larger amount, the selling price.
Even with a 10 percent discount you need to be careful: the profit per item halved (from 100 000 to 50 000). To keep the previous profit, you have to sell twice as much.
Where does the markup show up in the accounts?
If goods in retail trade are carried at selling prices, the markup sits separately in account 2980 "Trade markup" (NAS No. 21, paragraph 152). This is a contra account: if you subtract it from the selling price in 2920, what remains is the cost of the goods.
Example: 20 shirts × 400 000 = 8 000 000 soum were purchased, the markup of 25% = 2 000 000 soum, the selling price 10 000 000 soum. During the month 12 of them were sold. For simplicity, VAT is left aside.
| Transaction | Debit | Credit | Amount |
|---|---|---|---|
| Goods received from the supplier | 2920 | 6010 | 8 000 000 |
| Markup added | 2920 | 2980 | 2 000 000 |
| 12 shirts sold (at selling price) | 4010 | 9020 | 6 000 000 |
| Goods sold written off at selling price | 9120 | 2920 | 6 000 000 |
| Markup relating to the part sold | 2980 | 9120 | 1 200 000 |
Result: 9120 shows 6 000 000 − 1 200 000 = 4 800 000 soum, that is, a cost of 12 × 400 000. Gross profit is 6 000 000 − 4 800 000 = 1 200 000 soum, which is 20 percent of revenue, that is, the margin. The 800 000 soum remaining in 2980 is the markup on the 8 unsold shirts (8 × 100 000).
Practical tips
- Set price tags using markup and do your analysis using margin, but do not mix the two up
- Before announcing a discount, compare it with the margin: if the discount percentage is larger than the margin, every sale is a loss
- If reports say "profitability 20%", state clearly what it was divided by: cost or revenue
Test yourself
5 questions on this topic: pick an option or reveal the answer.
The "Shirin non" bakery has annual revenue of 120 mln soums and net profit of 18 mln soums. What is the return on sales (net profit / revenue)?
A workshop's monthly fixed costs are 12 000 000 soums. One unit of product sells for 50 000 soums, and its variable cost is 30 000 soums. How many units is the break-even point (the volume with neither profit nor loss)?
20 000 000 soums were placed for 2 years at 10% compound interest per year (interest is added to the amount at the end of each year). What will the total be at the end of 2 years?
10 000 000 soums were placed on deposit for 3 years at 20% simple interest per year (interest is calculated each year only on the initial amount). What will the total be at the end of 3 years?
"Nurafshon plastik" LLC bought the shares of another company and paid with finished products of its own production (hypothetical example). Under row 1 of the table to paragraph 244 of NAS No. 21, which journal entry records the purchase of shares by transferring products?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- NAS No. 21 "Chart of Accounts", paragraph 152 · if goods in retail trade are carried at selling prices, the trade markup is summarised in 2980; the markup relating to goods sold is recorded on the debit of 2980 and the credit of 9120
- NAS No. 21, paragraph 154 (lines 2, 13, 16, 17) · 2910–2990 / 6010; 9120 / 2910–2990; 2920 / 2980; 2980 / 9120
- NAS No. 21, paragraph 383 (line 1) · goods shipped to customers 4010 / 9020
- Example, formulas and calculations · compiled by the author, hypothetical