How is markup calculated?

Markup is calculated by determining how much more the selling price is compared to the cost of goods sold. Specifically, it is expressed as a percentage of the cost. The markup percentage provides businesses insight into how much they are adding to their costs to arrive at the price they set for their products or services.

Using the correct method, gross profit is found by subtracting the cost of goods sold from the selling price, and this gross profit figure can then be divided by the cost of goods sold to calculate the markup percentage. This means that if you wanted to find out how much of a markup you're applying based on your cost, this division gives you the right context: you're interested in how your gross profit (which reflects the additional amount above the cost) relates directly to the cost itself.

For instance, if your cost is $100, and you sell it for $150, your gross profit is $50. When you divide that $50 (gross profit) by the $100 (cost of goods sold), you obtain a markup of 0.5 or 50%. This calculation helps businesses assess their pricing strategies effectively, ensuring they cover costs while achieving desired profit margins.