My name is Ian and I have a markup question for you. I work for a painting company, specifically I estimate cost and sell painting projects. Within our office, we've had some discussion on how markup should be calculated for materials that we include in our prices. These are the two scenarios that we've come up with.

1. Mark up as a percentage of the cost: Cost = $ 10.00 X 15% Markup = $ 1.50. $ 1.50 + $ 10.00 equals $ 11.50 as a sale price.

2. Selling Price = Cost / (1-the desired profit margin). This would equal to $ 10.00 / (1-.15) = $ 11.76 roughly.

If you have any information on whether one is more correct and why, I would appreciate this. I want to make sure that I am marking things up correctly.

Ian

Ian,

I have seen percentage markup calculated both ways. The confusion comes from the imprecise way we use the term percentage. When we use the term percent we should always say percent of what.

My sales this year were only 80% of my sales last year.

The goods and services tax in Canada is 7%. I should say it is 7% of the price shown, because that's what happens. When I take an $5.00 item to the till the cashier asks for $5.00 + (0.07 $5.00) = $5.35

So what about 15% markup?

Is it 15% of your cost? If so then, for a cost of $100, a 15% markup would be $1.50.
Is it 15% of what your customer pays for the service? If so the markup is $1.76 since 15% of $11.76 is $1.76.

In my mind the correct interpretation is the first. If you tell your customer that your markup is 15% then I think your customer would assume that you were adding 15% of your costs.

Harley