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Business Finance 101 – Understand the difference between Mark-Ups and Margins when Pricing

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Business Finance 101 – Understand the difference between Mark-Ups and Margins when Pricing

Understand the difference between Mark-Ups and Margins when Pricing

It is common to not understand the difference between Mark-ups and Margins when it comes to pricing. This is part of the costing of goods and services, and either is not quite the same as the other.

We usually start with a cost price of the quantities for materials and labour, let’s say $1000.

If we Mark-up we add on top to the cost – let’s say 30%, then $300 is added and the sell price is $1300.

But the $300 compared to the Final Price is 23% of $1300, ((300/1300)X100). This is the Margin.

So if the Margin target is 30%, just adding 30% to the cost is incorrect.

To get 30% Margin on $1300 sell price is $390 (30% is 0.3 times $1300 gives $390). And the $390 from $1300 leaves $910 cost price to buy the goods.

And $390 is 42.8% Mark-up of $910. So if costs are $910 the calculation to achieve 30% margin is $910 x 1.428 = $1299.48, round up to $1300.

Many businesses wonder why they don’t get the profit they expect, and sometimes this is the reason. So check your figures and see if your Margins and Mark-ups are what you were expecting, and understand the difference between them!

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Author: accountkeepingplus

Administration, bookkeeping and compliance for small business, and Self-Managed Super Funds (SMSF) Training, trouble-shooting, or we can do the books and payroll for you! Self Managed Superannuation Fund Service Provider, Free support MYOB Certified Consultant, Reckon/QuickBooks Professional Partner.

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