Florida · California · NASCLA · Business math · Episode 6
Markup vs Margin
Chapters
- The job
- Two ratios
- The bid
- Convert
- Recap
In short
Markup is profit divided by cost; margin is profit divided by price. A job that costs $80,000 and sells for $100,000 has a 25 percent markup and a 20 percent margin. To price for a target margin, divide the cost by one minus the margin: $80,000 ÷ 0.80 = $100,000. Multiplying cost by 1.2 gives $96,000, only a 16.7 percent margin. Margin = markup ÷ (1 + markup); markup = margin ÷ (1 − margin).
- Markup = profit ÷ cost; margin = profit ÷ price.
- Price for a target margin: cost ÷ (1 − margin).
- A 25 percent markup is a 20 percent margin.
Transcript
The job
Two contractors both say they make 25 percent. They can mean different numbers. Markup and margin use the same profit, divided by different things. A job costs $80,000 to build, and it is priced at $100,000. The profit is $20,000 either way.
Two ratios
Markup divides the profit by the cost: 20,000 over 80,000 is 25 percent. Margin divides it by the price: 20,000 over 100,000 is 20 percent. Margin is always the smaller of the two, because the price is bigger than the cost.
The bid
Now price a bid. You want a 20 percent margin on $80,000 of cost. Pause. What price do you quote? $100,000. Divide the cost by one minus the margin: 80,000 over 0.8. Multiplying by 1.2 gives $96,000, and only about a 16.7 percent margin.
Convert
To switch between them, margin is markup over one plus the markup. And markup is margin over one minus the margin. A 25 percent markup is a 20 percent margin.
Recap
Markup over cost, margin over price. For a target margin, divide the cost by one minus the margin. Next: depreciation and percentage of completion. Subscribe so you catch it.
Sources
- Worked example on an invented job
Independent study material. EstatePass is not affiliated with NASCLA, PSI, Pearson VUE, the Florida CILB or the CSLB, and nothing here is legal advice. Any jobs and companies in our episodes are fictional.