Mark-up Versus Gross Profit

Mark-up

1.Mark-up amount

This indicates the amount that has been added as profit to the cost price of an item.  However, it is important to look at the two concepts mark-up and gross profit, as well as the misconceptions amongst businessmen concerning the two concepts.

The basis of this section is built on the principles set out in Example 14.  The influence of discount allowed in respect of the latter example will also have to be discussed further by means of another example.

2. Mark-up %

The profit, which is added to the cost price of an item, is usually indicated as a percentage and not as an amount.  It is also referred to as the mark-up percentage or profit surcharge.  The mark-up percentage is always calculated according to the cost price of an item.

It is also necessary to calculate the mark-up percentage by making use of a minimum of information available.  The use and application of the mark-up percentage will be explained by means of a few examples.

Only the selling price and cost price are available for calculating the mark-up percentage

Only the selling price and the gross profit are available for calculating the mark-up percentage.

Determining the mark-up percentage, where only the required gross profit percentage is available, is used regularly in practice.  It also serves as an aid in determining the viability of an enterprise or a specific project

3. Gross profit

       a. Gross profit amount

Gross profit indicates the profit made on the sale of an item taking into account the cost price of the item.  This has already been discussed in detail in section
Gross profit is always calculated on the net figure, in other words on the net selling price or net sales (turnover), whatever is applicable.

     b. Gross profit %

The gross profit is expressed as a percentage of sales.  It is always calculated on the net selling price or net sales (turnover).

     c. Theoretical gross profit

If an item is sold at the marked price, gross profit should be a certain amount.  However, in practice it will be necessary to make certain adjustments in respect of the cost price and/or selling price in order to reflect the true situation.

When selling prices change for some or other reason, for example promotions, only the difference in the selling price must be adjusted.  Adjustments could include the following:

  • Promotions.
  • Discount allowed.
  • Returns to suppliers.
  • Returns from customers.
  • Stock taken by the owner/shareholders.
  • Damaged/written off stock.

The theoretical gross profit forms part of the Goods Received Register, see Chapter 8, section 5.2 pages 6 to 11. In Step 4, …… “To complete the Goods Received Register it is necessary to calculate the total selling value of the invoice whilst price marking the goods”.

The total selling value of an invoice is determined by calculating the selling value of each item, before totaling that

At the end of every week and/or every month the theoretical gross profit percentage can be calculated. Add the cost value, selling value and gross profit columns to get the totals. The total selling value minus the total cost value should give the total theoretical gross profit. This gross profit, divided by the (total) selling value multiplied by 100 equals the (total) theoretical gross profit percentage.

The importance of theoretical gross profit determination is justified by comparing it to the actual gross profit acquired.  Stock will be taken every month.  Actual turnovers will have to be determined.  By placing the theoretical and actual gross profits alongside one another, one could find actual reasons for deviations. 

Differences could be attributed to the following:

  • Incorrect stocktaking.
  • Theft (stock and cash).
  • Administrative errors (incorrect recording of a transaction), non-billing.
  • Poor control in general

     d. Average gross profit %

The mark-up policy of the various product lines in a business may differ which could make the calculation of the average gross profit percentage of the business as a whole more difficult.  In order to overcome this problem, the average gross profit percentage is calculated as follows:

Therefore the gross profit percentage per department is multiplied by the sales contribution of the department in order to acquire the factor.  The factors of the distinctive department are added together to get the average gross profit of the business.

     e. Realised gross profit %

The realised gross profit is the actual gross profit acquired once all adjustments and write-offs have been taken into account.

Therefore it is the final gross profit of the business.  The gross profit percentage calculated on the “final”, realised gross profit is known as the realised gross profit percentage.  If this is compared with the adjusted, theoretical gross profit percentage, it could indicate various problems, if any, to the business manager, such as theft or administrative errors.

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