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Profit margin question
Posted on 10/4/19 at 12:33 pm
Posted on 10/4/19 at 12:33 pm
Help me understand the math when figuring margins. I’ve been taught that to get a “true” margin, you need to divide by reciprocal of the intended margin. So to make 10% on an item that costs $100 you take 100 / .9 and get 111.11 but 10 is 10% of 100.... how and why is 111.11 considered a 10% margin on 100?
7
Posted on 10/4/19 at 12:38 pm to MorgusTheMagnificent
The reciprocal of 10% is 10.
Posted on 10/4/19 at 1:24 pm to MorgusTheMagnificent
In your example, the $100 is the cost of the item, not the price you are selling it for.
You are marking the item up 10%, that is not the profit margin.
In your Example:
Cost = x - .1x
(X is Sell price)
100 =.9x
X=111.11
11.11/111.11 = 10% profit margin
If you did 100*1.1 = 110, you'd have a 10% markup but only a ~9% margin.
You are marking the item up 10%, that is not the profit margin.
In your Example:
Cost = x - .1x
(X is Sell price)
100 =.9x
X=111.11
11.11/111.11 = 10% profit margin
If you did 100*1.1 = 110, you'd have a 10% markup but only a ~9% margin.
This post was edited on 10/4/19 at 1:28 pm
Posted on 10/4/19 at 1:37 pm to MorgusTheMagnificent
You're exemplifying the difference between "cost plus" and true net margin. Cost plus is taking all of your direct and indirect costs and multiplying it by your cost plus margin to equal your sales price. Net margin is the difference between sales price and direct and indrect costs as a percentage of the sales price. To determine net margin take your costs and divide it by (1 - desired net margin). For example if you want to make 20% net profit, take your direct and indirect costs and divide by (1 -.2).
Posted on 10/4/19 at 2:05 pm to MorgusTheMagnificent
If your cost for an item is $100 and you want to make a 10 percent margin, you need to sell it for 100 / (1-.1) $111.12.
At that sales price, 90 percent of $111.12 is $100. So of your total sales price, 90 percent is going to cost of goods sold, and 10 percent to gross margin.
Your margin is a percentage of your revenue, not a percentage of your costs.
At that sales price, 90 percent of $111.12 is $100. So of your total sales price, 90 percent is going to cost of goods sold, and 10 percent to gross margin.
Your margin is a percentage of your revenue, not a percentage of your costs.
Posted on 10/4/19 at 3:04 pm to LSUFanHouston
Several folks above explained it well.
Margin is the true profit %. If you are looking to determine the percentage of profit your are looking to make, never use "markup".
Margin is the true profit %. If you are looking to determine the percentage of profit your are looking to make, never use "markup".
Posted on 10/4/19 at 3:10 pm to MorgusTheMagnificent
It might be easier to understand the difference with a bigger markup. If the cost is $50 and you mark up 100%, the sell price is $100. Clearly then the profit is 50%.
Posted on 10/4/19 at 3:57 pm to MorgusTheMagnificent
Lots of great answers here. What you should google and understand the difference is between margin and markup. They are different when being calculated financially.
Posted on 10/5/19 at 9:22 pm to LSUFanHouston
Where did y’all learn this stuff? Y’all all got mba’s?
Posted on 10/6/19 at 3:06 pm to CHiPs25
The way I explain it is one is a percent of cost and the other a percent of the resulting sale price. Mark up creates the margin. It is not the margin or profit %.
As the above example shows, you should use a spreadsheet then you can visualize it.
As the above example shows, you should use a spreadsheet then you can visualize it.
Posted on 10/6/19 at 10:43 pm to Rust Cohle
quote:
Where did y’all learn this stuff? Y’all all got mba’s?
I sell carpet for a living and know that.
Posted on 10/7/19 at 9:13 am to Rust Cohle
quote:jobs in sales
Where did y’all learn this stuff? Y’all all got mba’s?
Posted on 10/7/19 at 11:58 am to Flanders
quote:
Where did y’all learn this stuff? Y’all all got mba’s?
quote:
I sell carpet for a living and know that.
quote:
jobs in sales
I was gonna say middle school math.
Posted on 10/8/19 at 5:12 pm to Korkstand
This post was edited on 10/8/19 at 8:15 pm
Posted on 10/9/19 at 6:18 am to MorgusTheMagnificent
It’s pretty straightforward but can lead to tons of confusion. I deal with this confusion nearly every day at work when working on deals.
Margin % = Profit expressed as a percentage of sales price
Markup % = Profit expressed as a percentage of cost
If you have a goal to make a certain profit margin percentage, you do NOT multiply costs by that percentage.
Margin % = Profit expressed as a percentage of sales price
Markup % = Profit expressed as a percentage of cost
If you have a goal to make a certain profit margin percentage, you do NOT multiply costs by that percentage.
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