Lecture 2

OPMT 1110 Myra Andrews
Business Mathematics Fall 2024
Lecture 2: Markup and Margin

Markup (also called gross profit or margin): the difference between the cost of an item
and its selling price; a markup is added to the cost to cover the cost and create a profit.
SP = C + M M = SP − C SP = selling price C = cost M = markup (in $)
Rate of markup tells us what percentage must be added to the cost to get the selling
price. It is the retailer’s profit expressed as a percentage of their cost.
Markup M
Rate of Markup = × 100 rm = × 100
Cost C
Percent margin: the percentage of the selling price that is profit; the profit expressed
as a percentage of the selling price. It cannot exceed 100%. It tells the retailer the
maximum percentage they can reduce the selling price by without going below the cost.
Markup (or Gross Profit) M

Percent Margin = × 100 % mg = × 100
Selling Price SP
Margin and Selling both contain the word in
M M
rm C mg SP
o Percent Margin: the profit (markup) expressed as a percentage of the selling price
o Rate of Markup: you markup the cost not the selling price
o Rate of Markdown: Markdown the selling price and markup the cost.
Page 1 of 9
Ex 1: An item that costs a retailer $600 is sold for $750.
(a) How much is the markup (in dollars)? How much is their margin or gross profit?
(b) What rate of markup are they using? Rate of markup (based on cost) = ?
(c) What percentage of the selling price is profit? % margin (based on SP) =?
(d) If the retailer has a “25% off” sale, would their sale price be below cost?
(e) Up to what percentage can they reduce the SP by without going below cost?
Page 2 of 9
Ex 2: Retailers sell a Trek mountain bike for $750.
(a) Outspokin Bicycles maintains a 20% margin on all bikes they sell. How much did
the Trek bike cost Outspokin'?
(b) Another bike store, Krank It Up, marked up the cost of the Trek bike by 25%. How
much did the bike cost Krank It Up?
Page 3 of 9
Ex 3: Retailers pay $600 for an Orange laptop.
(a) Bits N Bytes marks up the cost of all laptops by 25%. How much would they sell the
Orange laptop for?
(b) If Compucon wants to achieve a 20% margin on all laptops (20% of the selling price
is profit), how much should they sell the Orange laptop for?
(c) On Black Friday, Compucon marks down the price of the Orange laptop by 14%.
What is the sale price?
Page 4 of 9
M M
rm C mg SP
Ex 4: Tech it Easy Electronics makes a profit of $150 on the sale of a tablet.
(a) If Tech it Easy marks up the cost by 25%, how much would they sell the tablet for?
(b) Another retailer makes a profit of $150 on the sale of a tablet. If they maintain a
20% margin on all products they sell, how much did the tablet cost the retailer?
Page 5 of 9
Desired Margin Rate of Markup Markup Multiplier

20% 25% 1.25
25% 33.33% 1.3333
30% 42.86% 1.4286
40% 66.67% 1.6667
50% 100% 2
60% 150% 2.50
75% 300% 4
80% 400% 5
Ex 5: Converting between a rate of markup and a percent margin and visa versa.
(a) A retailer marks up the cost by 25%. What percent margin are they achieving?
(b) If a retailer wants to achieve a 25% margin, what should their rate of markup be?
Page 6 of 9
Some retailers use a rate of markup to set their prices. If the
o Rate of markup = 25% → Selling Price = 125% of the cost
𝐒𝐏 = (𝟏 + 𝐑𝐚𝐭𝐞 𝐨𝐟 𝐌𝐚𝐫𝐤𝐮𝐩) × 𝐂𝐨𝐬𝐭
Other retailers set their prices to achieve a certain percent margin
20% margin: Markup (profit) is 20% of the selling price, Cost is 80% of the selling price
Selling Price is just the Cost divided by 0.80 since the Cost is 80% of the selling price
𝐂𝐨𝐬𝐭 𝐂
𝐒𝐏 = = mg as a decimal instead of a %
(𝟏𝟎𝟎 − 𝐩𝐞𝐫𝐜𝐞𝐧𝐭 𝐦𝐚𝐫𝐠𝐢𝐧)% 𝟏 − 𝐦𝐠
For example:
Cost Cost Cost
10% margin: SP = = =
(100 − 10)% 90% 0.90
Cost Cost Cost

(100 − 20)% 80% 0.80
Cost Cost Cost

(100 − 25)% 75% 0.75
Cost Cost Cost

(100 − 40)% 60% 0.60
Cost Cost Cost

(100 − 75)% 25% 0.25
Page 7 of 9
A: If you are given a
o Rate of markup + Cost: calculate markup (in $). Add it to the cost to get the SP.
o Percent margin + Selling Price: calculate markup (in $). Subtract it from the SP.
B: If given: either the rate of markup and selling price or the percent margin and cost:
1. Use equation SP = C + M and then algebra to solve for the missing piece.
2. Use the formulas instead:
𝐒𝐏 = (𝟏 + 𝐑𝐚𝐭𝐞 𝐨𝐟 𝐌𝐚𝐫𝐤𝐮𝐩) × 𝐂𝐨𝐬𝐭 = (𝟏 + 𝐫𝐦) × 𝐂
𝐂𝐨𝐬𝐭 𝐂
𝐒𝐏 = = mg as a decimal instead of a %
(𝟏𝟎𝟎 − 𝐩𝐞𝐫𝐜𝐞𝐧𝐭 𝐦𝐚𝐫𝐠𝐢𝐧)% 𝟏 − 𝐦𝐠
3. Convert from a rate of markup to a % margin or from a % margin to a rate of markup
Markup Rate of Markup rm

Percent margin = = × 100 = × 100
Selling Price 100 + Rate of Markup 1 + rm
Markup Percent Margin mg

Rate of Markup = = × 100 = × 100
Cost 100 − Percent Margin 1 − mg
C: If given both Markup (in $) and either the rate of markup or the percent margin then:
o or use M = rm × C or M = mg × SP
o use the triangles to solve for C or SP
Page 8 of 9
o All businesses have operating expenses or overhead

o P = net profit (or operating profit) E = operating expenses M = markup (gross profit)
Income Statement One Item

Sales SP (selling price)
– COGS (cost of goods sold) –C
= Gross profit =M
– Operating expenses – E (expressed as a percentage of C or SP)
= Net Profit = P (per item)
Ex 6: You maintain a 40% margin on all items you sell. What minimum monthly sales do
you need to cover your $8,000 per month of operating expenses?
1. (a) $150 (b) marked up the cost by 25% (c) 20% of the selling price is profit
(d) Yes, $562.50 sale price < $600 cost (e) maximum of 20% (20% off the $750 SP)
2. (a) $600 (b)$600 3. (a) $750 (b) $750 (c) $645 4. (a) $750 (b) $750
5. (a) 20% (b) 33.33% 6. $20,000
SP = C + M
Markup Markup
Rate of markup = × 100 % margin = × 100
Cost Selling Price
Cost C
SP = (1 + rate of markup) × Cost SP = =
(100 − percent margin)% 1 − mg
Page 9 of 9

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OPMT 1110 Myra Andrews

Business Mathematics Fall 2024

Lecture 2: Markup and Margin

SP = C + M M = SP − C SP = selling price C = cost M = markup (in $)

Markup (or Gross Profit) M

Margin and Selling both contain the word in

Ex 1: An item that costs a retailer $600 is sold for $750.

Ex 2: Retailers sell a Trek mountain bike for $750.

Ex 3: Retailers pay $600 for an Orange laptop.

Ex 4: Tech it Easy Electronics makes a profit of $150 on the sale of a tablet.

Desired Margin Rate of Markup Markup Multiplier

Some retailers use a rate of markup to set their prices. If the

o Rate of markup = 25% → Selling Price = 125% of the cost

o Rate of markup = 50% → Selling Price = 150% of the cost

o Rate of markup = 100% → Selling Price = 200% of the cost

o Rate of markup = 200% → Selling Price = 300% of the cost

𝐒𝐏 = (𝟏 + 𝐑𝐚𝐭𝐞 𝐨𝐟 𝐌𝐚𝐫𝐤𝐮𝐩) × 𝐂𝐨𝐬𝐭

Other retailers set their prices to achieve a certain percent margin

Cost Cost Cost

Cost Cost Cost

Cost Cost Cost

Cost Cost Cost

A: If you are given a

2. Use the formulas instead:

𝐒𝐏 = (𝟏 + 𝐑𝐚𝐭𝐞 𝐨𝐟 𝐌𝐚𝐫𝐤𝐮𝐩) × 𝐂𝐨𝐬𝐭 = (𝟏 + 𝐫𝐦) × 𝐂

3. Convert from a rate of markup to a % margin or from a % margin to a rate of markup

Markup Rate of Markup rm

Markup Percent Margin mg

o use the triangles to solve for C or SP

o All businesses have operating expenses or overhead

Income Statement One Item

= Net Profit = P (per item)

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