Gross margin is the profit before expenses expressed as a percentage of sales
Mark up is the profit before expenses expressed as a percentage of direct cost.
Generally speaking, in accounts presentations the 'Gross Profit' figure on which these margins are calculated is Sales less the Direct Cost of the product or service. The direct cost of a product includes:-

1. Manufacturer
   Raw material purchase cost plus Direct production costs, such as labour and consumables, plus Freight Costs.
2. Wholesaler
   Purchase cost plus freight costs.
3. Service Provider
   Cost of materials and consumables plus the cost of the hours providing the service

There is always an arithmetical relationship between Gross Margin and Mark Up as illustrated below:-
A Gross Margin of 40% requires a Mark Up of 66.67% calculated thus: 40 ÷ (100 - 40)
A Gross Margin of 60% requires a Mark Up of 150% calculated thus 60 ÷ (100 - 60)

To achieve a target Gross Margin of 60% on a product the purchase cost, direct production cost or landed cost of which is say $4.25 (excl. GST) requires a selling price of $11.95 calculated as follows:-

General Services Tax (GST) is a value added tax, it is similar in almost every respect to the Value Added Tax (VAT)applied in European countries. If an organisation in the countries where these taxes apply, is not registered as a payer of such taxes, then the tax on the purchase element of the costs should be included in the cost of the product or service. In most cases organisations will be registered, and these organisations should exclude the tax (as is the case in the example) when making these calculations.

While Gross Margin is an important measure of profitability, it cannot be viewed in isolation. Another important element of profitability is the level of investment required to achieve it. To illustrate this point, consider two products:

Product One has a gross margin of 40% and Product Two a gross margin of 30%.
The stock turnover of Product One is 2 times per year and the stock turnover of Product Two is 5 times per year.

Assuming each product achieves a sales level of $50,000 per annum the profitability is:

The simple table above illustrates that despite the fact that Product Two has a lower gross margin; it is in fact more profitable than Product One.  This is the basic discount store and supermarket strategy, “Pile it high and sell it cheap”

For more information relating to Gross Margin and Mark Up, go to the Questions and Replies page Gross Margin and Mark Up section

Look Up tables are available, produced on a Microsoft Excel spreadsheet that

1. Calculates target selling prices at various gross margin levels.
2. Calculates the target product cost required to achieve a market price and target gross margin

Download Look Up Tables.
Note:- Always check for viruses before opening downloaded files

Disclaimer
Despite the technical nature of many management techniques, business management is still mainly an art. It relies on the managers knowledge of the business and the environment in which it operates. Len Bainbridge does not accept any responsibility for any business actions or decisions resulting from the application of the business management techniques and the related examples, that are detailed in this web site.

For more information on aspects of Why Choose a Payroll Company versus doing Payroll yourself go to the Bookkeeping section

Disclaimer
Despite the technical nature of many management techniques, business management is still mainly an art. It relies on the managers knowledge of the business and the environment in which it operates. Len Bainbridge does not accept any responsibility for any business actions or decisions resulting from the application of the business management techniques and the related examples, that are detailed in this web site.

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