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My question is if I can have 80% margins with 180% markup of operating costs?

For instance if I have an operating cost of 300 dollars and I mark it up by 180% I would charge the customer 540 dollars.

540 / 300 1.8

I take it that in order to make my 80% gross margins I could simply charge the customer 540.00 - it covers 100% of operating costs and allows me to collect 80% of the operating costs as the profit.

((300.00 * 1.80) - 300.0) / (300.00 * 1.80) 0.4444444444444444

The above is what we profit divided by what we take in from the customer

It seems like to get a gross margin percentage I need to profit not 80% of the operating costs but 80% of the revenue from the customer. Is this the correct way to understand this?

Below are the formulas:

  • The gross profit P is the difference between the cost to make a product C and the selling price or revenue R.
    • P = R - C
  • The mark up percentage M is the profit P divided by the cost C to make the product.
    • M = P / C = ( R - C ) / C
  • The gross margin percentage G is the profit P divided by the selling price or revenue R.
    • G = P / R = ( R - C ) / R
onetruescottsman
  • 21

2 Answers2

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If you want gross margins of 80% it's clear from $.8=G = \frac{R-C}{R} = 1 - \frac{C}{R}$ that $C/R = .2$, which implies that $R/C = 5$. Since $R=P + C$, we have $$ 5 = \frac{R}{C} = \frac{P + C}{C} = \frac{P}{C} + 1 = M + 1, $$ so $M=1$ and the markup percentage should be 400%.

Shawn O'Hare
  • 742
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If you look again at your equation for $M$, you have $M=\frac RC-1$, so if the mark up percentage is $180\%$ you should be charging $2.8 \cdot 300=840$ for an item that costs $300$. Now your gross margin percentage is $G=\frac {840-300}{840}\approx 64.3\%$ The answer is no, a $180\%$ mark up does not support an $80\%$ gross margin. To have $80\%$ gross margin, the cost must be $20\%$ of the selling price, so the mark up is $400\%$

Ross Millikan
  • 374,822