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Margin and Mark Up

Margin and Mark Up. Calculating Profit. So far we have seen how to calculate Total Costs. Calculating Profit. So far we have seen how to calculate Total Costs Direct Material xxx Direct Labour xxx Direct Expenses xxx PRIME COST XXX Production Overheads xxx PRODUCTION COST XXX

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Margin and Mark Up

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  1. Margin and Mark Up

  2. Calculating Profit • So far we have seen how to calculate Total Costs

  3. Calculating Profit • So far we have seen how to calculate Total Costs Direct Material xxx Direct Labour xxx Direct Expenses xxx PRIME COST XXX Production Overheads xxx PRODUCTION COST XXX Admin Overheads xxx Selling and Distribution xxx TOTAL COST XXX

  4. Calculating Profit • And we know that we need to add profit to total cost to calculate the selling price to the customer

  5. Calculating Profit • And we know that we need to add profit to total cost to calculate the selling price to the customer Prime Cost xxx Production Overheads xxx PRODUCTION COST XX Selling/Distribution xxx Admin Overheads xxx TOTAL COST XX Profit ? Selling Price ?

  6. How to calculate Profit • There are TWO ways to calculate profit • Which to use is a matter of choice for a business • Neither is the ‘right’ or ‘wrong’ way – the business chooses • Both will give different profit figures • The two methods are Mark Up and Margin

  7. Calculating Mark-Up • Mark up is a percentage added to the total cost • Example and Method: Total cost is £500, mark up for profit is 15% • Multiply the total cost by the percentage mark up 500 x 15% = 75 (this is the amount of profit) • Add the profit to the total cost to get the selling price 500 + 75 = 575 • So mark up is the Total Cost + Mark Up %

  8. Exercises • Total costs of £1200, mark up of 10%. What is selling price? • Total costs of £2500, mark up of 15%. What is selling price? • Total costs of £850, mark up of 20%. What is selling price? • Total costs of £1700, mark up of 8%. What is selling price? • Total costs of £350, mark up of 35%. What is selling price?

  9. Exercises - Answers • Total costs of £1200, mark up of 10%. What is selling price? £1320 • Total costs of £2500, mark up of 15%. What is selling price? £2875 • Total costs of £850, mark up of 20%. What is selling price? £1020 • Total costs of £1700, mark up of 8%. What is selling price? £1836 • Total costs of £350, mark up of 35%. What is selling price? £472.50

  10. Mark up is the first way that businesses can choose to calculate profit

  11. And the other method … Cast your mind back to Business Accounting and the Profit Margin

  12. And the other method … Sales Revenue Less Expenses Equals Profit

  13. Profit Margin Profit Margin: Profit/Sales Revenue x 100

  14. This means that … Profit Margin is the percentage of Sales Revenue that is Profit

  15. So … If the profit margin is 20% This means that 20% of the sales revenue is profit And the other 80% is expenses (costs)

  16. Taking the earlier example … Selling Price 575 Less costs 500 Profit 75 PROFIT MARGIN - 75/575 x 100 = 13% This means that of the Selling Price of £575: 13% is Profit and 87% is Costs

  17. Profit Margin • Some businesses will have a target profit margin they want to reach • In this case they don’t use mark up, they use MARGIN to calculate the profit to add to total costs Total Cost xxx Profit margin ? Selling Price ?

  18. Calculate Profit Margin • If total costs are £500 and the profit margin is 20%. What is the selling price? • In this case the selling price will be 20% profit and 80% costs. • So £500 represents 80% of the selling price. • Therefore calculate: 500/80 x 20 = £125 (profit) Selling price is 500 + 125 = £625

  19. Exercises (round up to whole numbers) • Total costs of £1200, margin of 10%. What is selling price? • Total costs of £2500, margin of 15%. What is selling price? • Total costs of £850, margin of 20%. What is selling price? • Total costs of £1700, margin of 8%. What is selling price? • Total costs of £350, margin of 35%. What is selling price?

  20. Exercises - Answers • Total costs of £1200, margin of 10%. What is selling price? £1333 • Total costs of £2500, margin of 15%. What is selling price? £2941 • Total costs of £850, margin of 20%. What is selling price? £1063 • Total costs of £1700, margin of 8%. What is selling price? £1848 • Total costs of £350, margin of 35%. What is selling price? £538

  21. Summary • Businesses will choose whether to use Mark Up or Margin to calculate the profit to add to total costs to give the selling price • Mark up and Margin will give different profit figures • Mark up is the addition of a % to Total Costs • Margin is the percentage of the Selling Price that is profit (the rest of the Selling Price is costs)

  22. Quick Reference Example: Total Costs are £2500. Calculate selling price using: • Mark up of 20% • Margin of 20% Mark Up 2500 x 20% = 500 (profit) 2500 + 500 = £3000 (selling price) Margin 2500 / 80 x 20 = 625 (profit) 2500 + 625 = £3125 (selling price)

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