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Markup & Profit Margin Difference
Many business owners assume that Markup and Margin have the same meaning and are therefore, the same value. Unfortunately this is not the case, with a very substantial difference between the two and the way they are calculated, which is generally by applying a percentage to both figures. An important thing to note is that the Markup and Margin in Dollar terms will always be the same, in our example $2.
An example of this in action is a restaurant that sells a bottled beer for $6. The cost of the beer is $4 so the Markup on the beer has been 50%. Many people wrongly assume then that the profit is also 50%, but this isn't the case. To work out the Margin we need to apply one of the following formulas:
(Total Sales Ex Tax - Cost Ex Tax )/Total Sales Ex Tax*100% = Profit Margin %.
(6-4)/6*100=33.333333 or 33%.
(1-(Cost Ex Tax/Sell Ex Tax))x100
(1-(4/6))x100 = 33.333333 or 33%.
As you can see, our Markup is 50% and our Margin is only 33%.
If the business owner did not know these calculations, imagine the disaster when they try and add up their finances. They buy their beer for $4 and add a 50% Markup to sell at $6. Once the beer is sold, they take what they think is their Profit of 50% of $6, but is actually only $2, or 33%.
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