To run a profitable business you must be able to determine the markup and profit margin on your salable goods. These amounts are easy to determine and are necessary if you wish to continue to make a profit. These formulas can be used again and again as the cost of manufacturing goods changes. By implementing this formula on a regular basis, you will be able to keep your pricing equal to the profits you wish to make.
To determine the markup on a product, you must first find the total cost of the product to produce. This figure is determined by adding the cost of materials to the cost of labor to produce the end product.
As an example: if the raw material for your product costs the company $10.00 and the total man hours to produce the finished product are $10.00, your total cost of product would be $20.00. You can also include cost of spoilage in this figure if you choose, but it is not really necessary at this point. Next you must determine the amount of profit you would like to make on the product. For example, we will use the figure of 50%. You then multiply the cost ($20.00) by the percentage (.50); this gives you a figure of $10.00. You will then add $10.00 to the cost of the product, giving you a sales price of $30.00. It is that simple.
Margin is the percentage of the sales price that is above the cost of manufacturing the product. To determine the margin, you start by subtracting the amount of the cost from the final price. Using the above figures this calculation would read as: $30.00 -$20.00= $10.00. You would then divide the $10.00 by the original price of $30.00. $10.00/$30.00 = .34 or 34%.
By continuing to apply these formulas to each of your salable products, you can maintain the profit rate that you have determined for your company. This will also allow you to determine many other factors about your company. If profits are too low you may be able to adjust production costs or search for new material suppliers. If your profits are much higher than anticipated, you can adjust your pricing to a lower amount and possibly draw in new customers based on your new price structure. As costs for materials change, you can reevaluate your pricing to make sure that it is staying within company guidelines. Markup and sargin are very simple formulas to use to keep your company in the black.