May 2024 - 32

FARM MARKET & AGRITOURISM
What's the difference between markup and margin?
BY BRIAN MOYER | PENN STATE EXTENSION
A
retail farm market manager
knows that their business
needs to make a certain gross
profit percentage, in this case, let's
say 30%. What do they do?
The manager takes the cost of the
item and adds 30%. Does adding
30% markup to that item really
mean you are making a 30% profit
margin? Well, no. To determine the
profit margin you made on an item,
you need to take the markup amount
and divide that by the sale price of
the item and that will tell you your
profit margin.
Here's an example. Let's say an
item in your store cost you $1 to
purchase. You take that item and add
30% to it. Now, you sell the item for
$1.30. You've made 30 cents on that
item. You divide 0.30 by 1.30 and you
will see you've made only 23% gross
profit on that item.
Think about every item in your
market. If you were adding 30% to all
your products and thinking you are
making a 30% gross profit margin
when in fact you are losing almost
25% of your gross profits.
If we go back to $1 product cost,
that product would need to sell for
$1.44 to make a 30% profit on it.
Again, take $0.44 (the profit made
from the item) and divide it by the
sale price of $1.44 and you get a 30%
profit margin.
Figuring out your markup
percentage
The markup percentage is your
unit cost X the markup percentage,
and then add that to the unit cost to
get your sales price.
For example, if the unit cost is $5,
the selling price with a 30% markup
would be $6.50:
* Gross profit margin = sales
price - unit cost = $6.50 - $5
= $1.50.
* Markup percentage = gross
profit margin/unit cost =
$1.50/$5 = 30%.
* Sales price = cost X markup
percentage + cost = $5 X 30%
+ $5 = $6.50.
How to calculate gross
profit margin percentage
Gross profit margin is the gross
profit divided by sales price. In
this example, the gross profit
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