How to calculate the trade margin on a product: formula with examples. The essence of trade margins, its formation and calculation

I decided to create an online store and went to the forum to study the pricing policies of competitors. I came across a poll:

Forum members voted, shared their experiences and argued: is it possible to survive with a margin of 20-30% on cosmetics and 80% on jewelry? Someone complained that he was selling VIP sockets through an online store with a 25% markup, and his friend in Petrogradka was selling the same ones with a 500% - 700% markup. It works because it offers familiar designers a 20% kickback. Then Artem came and said that margin and markup differ from each other, like an apple from a cherry. And the survey is meaningless, because the margin cannot be more than 100%. Let's see if Artem is right.

What is a markup

Markup is the ratio of gross profit to cost. It helps us understand how much we have made.

Let's say we're selling balls. For each ball we pay 75 ₽ to the manufacturer and 25 ₽ to the transport company for delivery: 100 ₽ is the cost. If we sold the ball for 130 rubles, we received 30 rubles in gross profit. Gross profit is important for accounting, but it does not show how much we earned: is 30 rubles a lot or a little?

To understand the benefit, we divide the gross profit by the cost - we get a 30% markup.

Of all these indicators, only markup makes sense for business.

We sold the ball at a 30% markup.
The competitor - with a markup of 20% (40 ₽ divided by 200 ₽) We “gained” 30%, the competitor - 20%.
It doesn’t matter how much we earned in rubles, how much our competitor earned. Obviously, we sold the ball more profitably

What do we know	What do we understand?
We sold the ball and earned 30 rubles. The competitor earned 40 ₽	Nothing. It is not clear whether we earned a lot or a little. It seems the competitor earned more
We bought a ball for 100 rubles and sold it for 130 rubles. Competitor - bought for 200 ₽ and sold for 240 ₽	We made 30 ₽ for 100 ₽, a competitor - 40 ₽ for 200 ₽. The difference is 10 ₽, and our expenses are half as much. It seems we sold the ball more profitably

The markup shows the benefits of selling a product and helps you compare yourself with your competitors without being tied to money.

What is margin

Margin is the ratio of gross profit to revenue. It helps us understand how much of the proceeds we put into our pockets.

We sell balls for 130 ₽ and get a gross profit of 30 ₽. We earned 13,000 ₽ from the sale - that’s how much is in the cash register. But how do you know your gross profit? How much did we earn? To understand this, let’s calculate how much gross profit we get from each ruble from the sale of the ball. This is the margin.

A margin of 23% means that for every 1 ₽ from a sale, we put 23 kopecks in our pocket.

Let's calculate how much gross profit we received with revenue of 13,000 rubles.

Our gross profit was 3000 ₽ - that’s how much we’ll put in our pocket.

Margin shows how much of the proceeds from the sale of a product we put into our pockets. It helps you manage your business - regulate prices, sales volumes, product range - and get the desired income.

Maximum markup and margin

The markup can be anything. We bought a ball for 100 rubles and sold it for 500 rubles - the markup is 400%. The size of the markup can only be limited by legislation and common sense.

The margin is limited. We found a ball on the street and sold it for 500 rubles. Since we got it for free, its cost is zero. Therefore, 500 ₽ is our gross profit, and the margin is 100%. We will not earn more than what we received for the product - the margin does not exceed 100%.

Artem was right:
- margin and markup are different things;
- the markup can be any, and the margin is no more than 100%.

How does markup contribute to pricing?

Let’s imagine that in addition to balls, we sell dozens of other goods with different costs and prices. Without a markup, we will not understand how much we earn from what and which product is more profitable to sell.

We don't know the markup. We seem to make the most money on boxing gloves, the least on jump ropes and badminton.

Product	Cost price	Price	Gross profit
ball	100 ₽	130 ₽	30 ₽
jump rope	30 ₽	50 ₽	20 ₽
badminton	120 ₽	140 ₽	20 ₽
boxing gloves	60 ₽	100 ₽	40 ₽
flippers	70 ₽	100 ₽	30 ₽

Let's calculate the markup. It turns out that we make more money on boxing gloves and jump ropes. These products have the same markup, although the gross profit on a pair of boxing gloves is twice as large. We sell badminton with the least profit. Although from its sale we receive the same gross profit as from the sale of a jump rope. Without a markup, we won’t figure out what is more profitable to trade.

Product	Cost price	Price	Gross profit	Extra charge
ball	100 ₽	130 ₽	30 ₽	30%
jump rope	30 ₽	50 ₽	20 ₽	67%
badminton	120 ₽	140 ₽	20 ₽	17%
boxing gloves	60 ₽	100 ₽	40 ₽	67%
flippers	70 ₽	100 ₽	30 ₽	43%

Without knowing the markup, we don’t understand the benefits of selling the product, which means we can make it cheaper.

For several months in a row we have been selling balls for 130 rubles. Does this mean we earn the same? Not if the cost of the balls has changed.

Month	Cost price	Price	Gross profit	Extra charge
January	100 ₽	130 ₽	30 ₽	30%
February	110 ₽	130 ₽	20 ₽	18%

Let's find out how much money we need to make in February in order to sell the ball at a profit like in January. Knowing the new cost and the required markup, we determine the gross profit.

Let's add the required gross profit to the cost and set the price to 143 ₽. Now we won’t sell it cheap - we will sell the goods at the same profit as in January. This is how the markup determines the price.

Month	Cost price	Price	Gross profit	Extra charge
January	100 ₽	130 ₽	30 ₽	30%
February	110 ₽	143 RUR	33 RUR	30%

Markup is a pricing tool. It allows you to compare different periods and products, find out how competitors work, and adjust your prices.

How margin helps a business grow

Suppose we spent 10,000 rubles on the purchase of balls and received 13,000 rubles from their sale. Gross profit - 3,000 ₽. Of this, 2,000 ₽ went to operating expenses: rent of premises, payment of electricity and salaries to sellers. After this, we were left with a net profit of 1,000 rubles.

Let's calculate the margin.

Let's find out how much of the revenue was consumed by operating expenses.

Let's determine what portion of the proceeds remained in the form of net profit.

We pocketed 23% of the proceeds from ball sales. But we spent part of this money on renting premises, electricity and salaries - operating expenses “ate” 15% of our revenue. We can dispose of the remaining net profit at our discretion - this is 8% of revenue.

Margin shows how we do business.

	Share of gross profit
Business	Margin	Operating costs	Profit Loss
On the plus side, the margin is higher than operating costs	23%	15%	8%
At zero - margin equals operating costs	23%	23%	0%
The downside is that the margin is less than operating costs	23%	25%	−2%

Knowing the size of operating costs, we know what the minimum margin should be in order not to go bankrupt. This way we can regulate prices, sales volumes and influence profit margins. If the landlord increases the rent and operating costs fall below the margin, we will no longer be profitable. Then something will have to be decided. There are many options:
- increase the selling price of the ball - increase the markup;
- negotiate a reduction in the purchase price to reduce costs;
- find another supplier who sells cheaper;
- find another premises with a lower rent;
- save on something to reduce operating costs;
- increase sales volumes to cover operating costs;
- stop selling balls and start selling boxing gloves because they have high margins.

What we choose depends on the situation. The main thing is to see the benefit in time and take advantage of it or prevent an impending disaster if something goes wrong. The margin will help you figure it out.

Margin is a tool for assessing sales performance and making management decisions.

Let's sum it up

The markup shows how much we have made on the cost of the product and helps us not to undercut if the supplier has raised prices. The markup can be anything.

The margin tells us how much we will put in our pocket from each ruble we earn and helps us decide how to develop the business - reduce operating costs, increase the price, change the supplier or start selling something new. The margin cannot be more than 100%.

Before you discuss business with colleagues, make sure you are talking about the same things.

Seller. Its value is determined based on the structure of the market and the consumer properties of the product being sold. To ensure that trading activities are not unprofitable, the margin is set in such a way that it covers all the seller’s expenses associated with the purchase of raw materials, manufacturing of goods and transportation. In general terms, a markup is an added value expressed as an addition to the final price of a product or service. It pays off and allows him to pay taxes and make a profit.

The role of the state in the formation and control of mark-ups on goods and services

Taking into account the fact that the Russian Federation is a state whose functioning is based on the market mechanism for regulating supply and demand, its role in the formation of markups on products and services sold is limited exclusively to control functions.

Thus, the markup on goods is the exclusive authority of enterprises and organizations operating in trade and economic activities (according to the Methodological Recommendations for setting tariffs on products). The basic rule is that it must cover the seller’s costs, as well as the amount of deductions (taxes, insurance premiums).

The state and its authorities can set its maximum size only for certain groups of goods (exclusive). The markup in a store, enterprise, company on products intended for children's consumption (milk formula), certain types of medicines (medical devices) is established by the executive authorities in a specific area This is necessary in order to prevent arbitrary increases in prices for essential goods.This is monitored by specially authorized territorial bodies of the antimonopoly service.

Trade margin: formula for calculating the turnover (total) of an enterprise

It is known that there are several prices for goods and services: retail, wholesale, purchase. They all differ in the way they acquire and further sell their products. The calculation of the markup should also be calculated in various ways. There are two main methods of calculation: by total turnover and by assortment. Each of them is used in a specific situation, and therefore they cannot be considered universal. However, there is a general principle - in all cases, the trade margin is considered as an absolute indicator, and it is expressed in the form of gross income.

The calculation of the markup is the following formula:

• Gross income = (volume of total trade turnover) x (calculated trade markup): 100. In this case, the value of the calculated markup = trade markup: (100 + trade markup in %) x 100. By combining 2 formulas, we get a method for calculating the markup on total trade turnover: VD = (total turnover x trade margin in %): (100 + trade margin in %).

This method can be applied only if it is necessary to find the amount of markup on goods sold that have homogeneous characteristics. Simply put, it can be both food and alcohol products. It is important that the calculated products do not differ from each other and ideally have the same value of the trade margin, which must be calculated in monetary terms.

Calculation of markup on the assortment of turnover

Most large retail outlets offer a variety of products. This means that for the profitability of the enterprise, individual markup coefficients are established for different categories of products sold. To calculate the total amount of the premium for all goods, it is necessary to use other indicators. Thus, the markup on a product can be calculated using the following formula:

• Gross income = (T1 x PH1 + T2 x PH2 + ...Tn x PHn): 100.

  Here, the value of trade turnover of a specific group of goods is considered as T1, and PH1 is the estimated trade markup for this group. PHn can be calculated using the formula:

  PHn = THn: (100 + THn) x 100. Where THn is the value of the trade markup for product groups in % terms.

In conclusion, it should be noted that the markup is the total gross income of an enterprise or firm, expressed in monetary form and covering the costs of mandatory government payments and expenses. Calculation using this formula is possible provided that each group of goods sold by a retail chain or enterprise has different markup values, in addition, they must be recorded in the appropriate columns of the balance sheet.

Non-traditional methods of calculating mark-ups on goods and services: by average percentage

This method of calculating the markup is simple and transparent. This allows you to use it for calculations in any, even small organization. However, there is one significant drawback - the data is averaged, and the formula itself cannot be used to calculate the amount of taxation (Article 268 of the Tax Code). Gross income based on average interest has the form:

• VD = (size of turnover (T) x average percentage of gross income (P)): 100.

  In this case, the percentage of FD has the form: P = (trade markup at the beginning of the reporting period + trade markup on goods of the reporting period - trade markup on goods retired from circulation): (T + balance of goods at the end of the reporting period) x 100.

It should be noted that in this formula, the markup is an average value calculated taking into account the company’s turnover and actual indicators at the time of calculation (markup on the balance of products, markup on goods outside of circulation). The obtained values ​​cannot be used in official reporting submitted to the tax authorities. This may result in fines for failure to properly record items that are subject to taxation. Moreover, this may be regarded as an attempt to evade taxes, which is punishable by law.

Features of calculating the value of the markup on the assortment of the remaining goods of the enterprise

Calculation of gross income on the balance of goods can be made only after inventory, which must be carried out at the end of each month. Data on the value of goods balances at the end of the month and the cost of products sold are used as calculation indicators. So, the amount of income will be:

• Вд = (trade markup on the first day of the billing month + trade markup for the current period - markup for goods retired from circulation) - trade markup for the balance of goods based on inventory results.

This method of calculation makes sense for small enterprises or firms that keep records using barcodes. Based on this formula, we can conclude that the markup is the value of a company or institution, calculated on a residual basis.

Conclusion

It should be noted that such a concept as the value of the margin, or trade margin, is used by enterprises with any size of turnover. This indicator will provide accurate data on the amount of income, as well as the unprofitability of the institution’s activities. In general terms, a markup is a company without all the costs: taxation, payments to non-state funds, operating costs. Proper maintenance of the balance sheet will allow you to draw a conclusion about the profitability of the enterprise and the need for further production of goods.

The profitability of sales can be expressed in two ways: through the gross margin ratio and through the markup on cost. Both coefficients are derived from the ratio of revenue, cost and gross profit:

Revenue 100,000
Cost (85,000)
Gross profit 15,000

In English, gross profit is called “gross profit margin”. It is from this word “gross margin” that the expression “gross margin” comes.

The gross margin ratio is the ratio of gross profit to revenue. In other words, it shows how much profit we will get from one dollar of revenue. If it is 20%, this means that every dollar will bring us 20 cents of profit, and the rest must be spent on the production of the goods.

Markup on cost is the ratio of gross profit to cost. This ratio shows how much profit we will get from one dollar of cost. If it is 25%, then this means that for every dollar invested in the production of a product, we will receive 25 cents of profit.

Why do you need to know all this during the Dipifr exam?

Unrealized gains in inventory.

Both of the Dipifr exam profitability ratios described above are used in the consolidation problem to calculate the adjustment to unrealized profits in inventory. It occurs when companies in the same group sell goods or other assets to each other. From the point of view of separate reporting, the selling company receives a profit from sales. But from the point of view of the group, this profit is not realized (received) until the purchasing company sells this product to a third company that is not part of this consolidation group.

Accordingly, if at the end of the reporting period the inventories of the group companies contain goods received through intra-group sales, then their value from the group’s point of view will be overstated by the amount of intra-group profit. When consolidating, adjustments need to be made:

Dr Loss (seller company) Kt Inventories (buyer company)

This adjustment is one of several adjustments that are necessary to eliminate intercompany turnover on consolidation. There is nothing difficult about making this entry if you can calculate what the unrealized gain is in the purchasing company's inventory balance.

Gross margin ratio. Calculation formula.

The gross margin coefficient (in English gross profit margin) takes 100% of the sales revenue. The percentage of gross profit is calculated from revenue:

In this picture, the gross margin ratio is 25%. To calculate the amount of unrealized profit in inventory, you need to know this coefficient and know what the revenue or cost was equal to when selling the goods.

Example 1. Calculation of unrealized profit in inventories, GFP - gross margin ratio

December 2011
Note 4 – Sales of inventories within the Group

As at 30 September 2011, Beta and Gamma inventories included components purchased from Alpha during the year. Beta purchased them for $16 million, and Gamma for $10 million. Alpha sold these components with a gross margin of 25%. (note: Alpha owns 80% of Beta's shares and 40% of Gamma's shares)

Alpha sells goods to Beta and Gamma companies. The phrase “Beta purchased them (the components) for $16,000” means that when they sold those components, Alpha's revenue was equal to 16,000. What the seller (Alpha) had as revenue is the buyer (Beta)'s cost of inventory. The gross profit for this transaction can be calculated as follows:

gross profit = 16,000*25/100 = 16,000*25% = 4,000

This means that with revenue of 16,000, Alpha made a profit of 4,000. This amount of 16,000 is the value of Beta's inventory. But from the group's point of view, the inventory has not yet been sold, since it is in the Beta warehouse. And this profit, which Alpha reflected in its separate financial statements, has not yet been received from the group’s point of view. For consolidation purposes, inventories should be stated at cost of 12,000. When Beta sells these goods outside the group to a third company, for example, for $18,000, she will make a profit on her transaction of 2,000, and the total profit from the group's point of view will be 4,000 + 2,000 = 6,000.

Dr Loss OPU Kt Inventories - 4,000

RULE 1

If the condition gives a gross margin coefficient, then you need to multiply this coefficient in % by the remaining inventory of the buyer’s company.

Calculating unrealized profits in inventory for Gamma will be a little more complicated. Typically (at least in recent exams) Beta is a subsidiary and Gamma is accounted for using the equity method (associate or joint venture). Therefore, Gamma needs to not only find the unrealized profit in inventory, but also take from it only the share that the parent company owns. In this case it is 40%.

10,000*25%*40% = 1,000

The wiring in this case will be like this:

Dr Loss of operating profit Kt Investment in Gamma - 1,000

If you come across a general physical product during the exam (as in this example), then it will be necessary to make adjustments in the consolidated general physical product itself in the “Inventories” line:

for the line “Investment in an associated company”:

and in calculating consolidated retained earnings:

The rightmost column shows the points awarded for these consolidation adjustments.

Markup on cost. Calculation formula.

Mark-up on cost (in English mark-up on cost) takes 100% of the cost value. Accordingly, the percentage of gross profit is calculated from the cost:

In this picture, the markup on cost is 25%. Revenue as a percentage will be equal to 100% + 25% = 125%.

Example 2. Calculation of unrealized profit in inventories, general physical transfer - markup on cost

June 2012
Note 5 – Sales of inventories within the Group

As at 31 March 2012, Beta and Gamma's inventories included components purchased by them from Alpha during the year. Beta purchased them for $15 million, and Gamma for $12.5 million. When setting the selling price for these components, Alpha applied a markup of 25% of their cost. (note: Alpha owns 80% of Beta's shares and 40% of Gamma's shares)

The gross profit for this transaction can be calculated as follows:

If you put together a proportion to find X, you get:

gross profit = 15,000*25/125 = 3,000

Thus, Alpha’s revenue, cost and gross profit for this transaction were equal:

This means that with revenue of 15,000, Alpha made a profit of 3,000. This amount of 15,000 is the value of Beta's inventory.

Consolidation adjustment for unrealized gains in Beta inventory:

Dr Loss OPU Kt Inventories - 3,000

For Gamma, the calculation is similar, only you need to take the share of ownership:

gross profit = 12,500*25/125 *40% = 1,000

RULE 2 To calculate unrealized profit in inventory:

If the condition gives a markup on the cost, then you need to multiply the remaining inventory of the buyer’s company by the coefficient obtained as follows:

• markup 20% - 20/120
• markup 25% - 25/125
• markup 30% - 30/130
• markup 1/3 or 33.3% - 33.33/133.33 = 0.25

In June 2012, there was also a consolidated general financial statement, so the reporting adjustments will be similar to those given in excerpts from the official response for example 1.

Therefore, let's take an example of calculating unrealized profit in inventories for a consolidated OSD.

Example 3. Calculation of unrealized profit in inventories, OSD - markup on cost

June 2011
Note 4 - implementation within the Group

The Beta company sells Alpha and Gamma products. For the year ended March 31, 2011, sales volumes to these companies were as follows (all goods were sold at a markup of 1 3 33/% of their cost):

As at 31 March 2011 and 31 March 2010, Alpha and Gamma's inventories included the following amounts relating to goods purchased from Beta.

Amount of reserves for

Here a markup on the cost of 1/3 is given, which means the required coefficient is 33.33/133.33. And there are two amounts for each company - the balance at the beginning of the reporting year and at the end of the reporting year. To determine the unrealized profit in inventories at the end of the reporting year in examples 1 and 2, we multiplied the coefficient by the balance of inventories at the reporting date. This is enough for general physical training. In the OSD, we need to show the change in unrealized profit over the annual period, so we need to calculate unrealized profit both at the beginning of the year and at the end of the year.

In this case, the formulas for calculating the adjustment for unrealized profit in inventories will be as follows:

• Alpha - (3,600 - 2,100) * 33.3/133.3 = 375
• Gamma - (2,700 - zero) * 33.3/133.3 * 40% = 270

In the consolidated OSD, the cost price (or gross profit as in the official answers) is adjusted:

Here in the formulas for calculating unrealized profit there is a coefficient of 1/4 (about 25), which in fact is equal to the value of the fraction 33.33/133.33 (can be checked on a calculator).

How the examiner formulates the condition for unrealized profits in inventories

Below I have provided statistics on the unrealized gain in inventory note:

• June 2014
• December 2013— markup on cost 1/3
• June 2013— markup on cost 1/3
• December 2012— rate of profit from sales of goods 20%
• June 2012— markup on cost 25%
• December 2011
• June 2011— markup on cost 33 1/3%
• Pilot exam— gross profit of each sale 20%
• December 2010— trade margin on the total production cost 1/3
• June 2010— sold components with a gross margin coefficient of 25%
• December 2009— profit from each sale 20%
• June 2009— markup of 25% of cost
• December 2008— sold components with a trade margin equal to one third of the cost.
• June 2008— 25% markup on cost

From this list one can deduce RULE 3:

1. if there is a word in the condition "cost price", then this is a markup on the cost, and the coefficient will be in the form of a fraction
2. if the condition contains the words: “sales”, “gross margin”, then this is the gross margin coefficient and you need to multiply the remaining inventory by the given percentage

In December 2014, you can expect a gross margin ratio. But, of course, the examiner may have his own opinion on this matter. In principle, there is nothing difficult in making this calculation, whatever the condition.

In December 2007, when Paul Robins had just become a Dipif examiner, he gave a condition involving unrealized gains in fixed assets. That is, the parent company sold a fixed asset to its subsidiary at a profit. This was also an unrealized profit that had to be adjusted when preparing consolidated statements. This condition appeared again in June 2014.

I will repeat rules for calculating unrealized profits in inventories in the Dipifr exam:

1. If the gross margin coefficient is given in the condition, then this coefficient (%) must be multiplied by the remaining inventory of the buyer’s company.
2. If the condition gives a markup on the cost, then you need to multiply the remaining inventory of the buyer’s company by the fraction 25/125, 30/130, 33.3/133.3, etc.

Has the Dipifr exam format changed in June 2014?

I've been asked this question several times already. This question is probably due to the fact that the first page of the exam booklet has changed. But this does not mean that the format of the exam itself has changed. The last time the change to a new exam format was announced in advance, the examiner prepared a pilot exam to show how the Dipifr exam items would look in the new format. In June 2014 there is nothing like that. I don't think there is any need to worry about this. I already have enough anxiety before the exam.

One more thing. Preparation for the Dipifr exam on June 10, 2014 is coming to an end. It's time to write practice exams. I hope that I will have time to prepare a trial exam for June 2014 and will publish it soon.