Gross Margin (quick question)

buster350
buster350 Registered Posts: 9 Regular contributor ⭐
in General discussion
Hi all... dumb question and yes i know its late but .......

Cost of production equals (Say) £1500.... the question is...

If the target gross margin with this cost base is 48%, how much should we estimate for the job to the customer excl. Vat?

i am thinking 1500 * 48% but just dont look right this time of night?

Please help my silly question

Cheers

Comments

  • uknitty
    uknitty Registered Posts: 591 Epic contributor 🐘
    I always find Margin and Mark up really tricky. Right lets see how I do....

    Mark up is the amount that you add on top of the cost price. So if it cost 80 and you have a 25 % mark up the selling price would be £100.

    Working it backwards if you have the selling price but want to find out the cost when you are told it has been marked up by 25 % the maths is 100/125 *100 = £80

    Margin is the amount of the total sale that is profit so in the above example 100 - 80 = 20 profit. 20/100 = 0.2 or 20 % margin.

    The quickest way to work out the selling price that is required to achieve a certain margin is to use

    Cost / (( 100 -Margin Requied/100) (sounds more complicated than it is....)

    In your example this would be

    1500/ (0.52) = 2885

    As a check you are correct what you do is remove the cost price from the selling price so you calculate the profit so:

    2885 - 1500 = 1385

    So 1383 of the total selling price is profit which means you have a margin of:

    1385/ 2885 = 48 %

    (there has been rounding in my calculations but the basic principle is correct !)

    Hope that helps.
  • PGM
    PGM Registered Posts: 1,954 Beyond epic contributor 🧙‍♂️
    Nothing seems to cause so much confusion as this;

    Markup is based on cost. Its a cost plus method. Cost 100, markup 10%, sell 110.

    Margin is based on revenue. If you sell at 100 with 10% margin, the cost must be 90. Or vice versa cost 90 /0.9 to gross the cost up, to find the selling price of 100.
  • uknitty
    uknitty Registered Posts: 591 Epic contributor 🐘
    What PGM said :D

    I understand margin but it is so difficult to explain well ...
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034 mod
    I hope this helps based on VAT

    If you want to sell something for £200, then you have to add 20% for VAT so the customer will pay £240

    You don't take off 20% to find the amount without VAT

    The VAT example is a bit like sales mark up
    You find the costs and add a % to find the price

    Margin on the other hand is how much of the price is profit

    If we assume our product costs us £200 to make and is sold for £240
    (and there is no VAT)

    Then the margin is £40/£240 or 16.7%
    Sandy
    sandy@sandyhood.com
    www.sandyhood.com

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