What is the difference between gross profit margin and markup?

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A:

The difference between gross profit margin, or simply gross margin, and markup lies in the information each provides. Both are accounting terms used in determining metrics of profitability and may even examine the same numbers in regard to a sale or exchange of goods, but their respective values are markedly different and of different significance in examining profits. Looking at each serves a purpose in seeking to clarify how efficiently a company functions in regard to revenue earnings and its ability to thrive and grow as a business.

Gross profit margin is the profit return on a product expressed as a percentage value in proportion to the total revenue generated by sales of the product. To put this in terms of a real-world example, consider the following: A company spends $8,000 to produce a product and receives $20,000 in sales revenue for the product. The gross profit margin is then calculated as ($20,000 - $8,000) / $20,000 or 60% gross profit margin.

Markup represents the amount added to a company’s wholesale cost of producing an item to arrive at the retail sales price. However, markup is also commonly rendered as a percentage instead of a simple dollar amount, calculated by subtracting direct production costs from sales revenue, and then dividing that figure by the direct production costs figure. Using the same values from the example above, the equation is ($20,000 - $8,000) / $8,000 or a 150% markup.

A comparison of the two terms and the figures their respective calculations render makes it clear they are essentially different sides of the same coin. It is important to note that gross profit margin does not include all of a company's costs and expenses, only the costs directly involved with production usually designated as cost of goods sold, or COGS. Therefore, neither the gross profit margin nor the markup calculation can be used to determine a company's actual realized, or net, profit.


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