Markup on Cost

markup on cost

The difference between price and cost, measured relative to cost, expressed as a percentage

In a conventional approach, firms estimate the average variable costs of producing and marketing a given product, add a charge for variable overhead, and then add a percentage markup, or profit margin. Variable overhead costs are usually allocated among all products according to average variable costs. For example, if total variable overhead costs are projected at $1.3 million per year and variable costs for planned production total $1 million, then variable overhead is allocated to individual products at the rate of 130 percent of variable cost. If the average variable cost of a product is estimated to be $1, the firm adds a charge of 130 percent of variable costs, or $1.30, for variable overhead, obtaining a fully allocated cost of $2.30. To this figure the firm might add a 30 percent markup for profits, or 69«, to obtain a price of $2.99 per unit.

Markup on cost is the profit margin for an individual product or product line expressed as a percentage of unit cost. The markup-on-cost, or cost-plus, formula is given by the expression:

Markup on Cost =

Price - Cost Cost profit margin

The difference between the price and cost of a product

The numerator of this expression, called the profit margin, is measured by the difference between price and cost. In the example cited previously, the 30 percent markup on cost is calculated as ati r^ . Price - Cost Markup on Cost = -cost-

Solving Equation 12.1 for price provides the expression that determines price in a cost-plus pricing system:

Continuing with the previous example, the product selling price is found as

Price = Cost (1 + Markup on Cost) = $2.30(1.30) = $2.99

markup on price

The difference between price and cost, measured relative to price, expressed as a percentage

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