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Margins

This document explains the differences between mark-up and margins, highlighting that margin is sales minus the cost of goods sold, while mark-up is the increase in cost to determine the selling price. It also discusses the importance of gross margin in sales performance and provides methods for calculating single trade discounts and discount series. Examples are included to illustrate the calculations for discounts and net invoice prices.

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angie.agana
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15 views20 pages

Margins

This document explains the differences between mark-up and margins, highlighting that margin is sales minus the cost of goods sold, while mark-up is the increase in cost to determine the selling price. It also discusses the importance of gross margin in sales performance and provides methods for calculating single trade discounts and discount series. Examples are included to illustrate the calculations for discounts and net invoice prices.

Uploaded by

angie.agana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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DIFFERENTIA

TE MARK-UP
FROM
MARGINS
Background Information
This lesson focuses on the
discussion of the following topics: (a)
differentiate mark-up from margins;
(b) describe how gross margins is
used in sales; (c) compute single
trade discounts and discount series.
Differentiate Mark-up from Margins

Profit margin and mark-up are two different


accounting terms that use the same input and
analyze the same transaction, yet show different
information. The difference between margin and
mark-up is that margin is sales minus the cost of
goods sold, while mark-up is the amount by
which the cost of a product is increased in order
to derive the selling price. Margin (also known
as gross margin) is sales minus the cost of goods
sold
GROSS MARGIN = SALES – COST OF GOODS
SOLD
Example:
If a product sells for ₱200 and cost ₱120 to manufacture, its
margin is ₱80. Or, as stated as a percentage, the margin
percentage is 40% (calculated as the margin divided by sales)

Gross Margin = Sales – Cost of Goods


= ₱200 – ₱120
= ₱80

Gross Margin in Percentage = Gross Margin / Sales


= ₱80 / ₱200
= 40%
Mark-up is the amount by which the cost of a product is
increased in order to derive the selling price.
MARK-UP = SELLING PRICE – COST PRIC
Example:
To use the preceding example, a mark-up of ₱80 from the ₱120
cost yields the ₱200 price. Or, stated as a percentage, the
mark-up percentage is 66.67% (calculated as the markup
divided by the cost price/product cost)

Mark-up = Selling Price – Cost Price


= ₱200 – ₱120
= ₱ 80

Mark-up Percentage = Mark-up Price / Cost Price or


Product Cost
= ₱80 /₱ 120
= 66.67%
Describe how Gross
Margin is used in
sales
Gross profit margin is a ratio that
indicates the performance of a company’s
sales and production. This ratio is made by
accounting for the cost of goods sold and
your total revenue. If your business has a
gross profit margin of 24%, for example, it
means that 24% of your total revenue
became profit.

A higher gross profit margin indicates


efficient processes in a company. A lower
ratio indicates your processes may not be
efficient as they could be. You can also use
the gross profit margin to look at the
effectiveness of individual products or
Compute Single Trade
Discounts and Discount Series
A trade discount is a reduction from list
price granted to buyers. It could take the
form of volume discounts for large
purchases, dealer’s or distributor’s
discounts, or special discounts granted at
the discretion of the seller. Trade
discounts could either be a single discount
or a series discounts.
Single Discount
Computing for discounts makes use of
our basic percentage formula
P = BR,
where:
P = percentage is the DISCOUNT
B = base is the LIST PRICE
R = rate is the DISCOUNT RATE
Example:
Compute the discount for an item with a list price of ₱ 1,250.00
subject to a 15% discount. What is its discount? And its net
invoice price (NIP)?

Given: List Price = ₱ 1,250.00


Discount Rate = 15% Find:

(a) Discount

(b) Net Invoice Price


Solutions:

a. Discount
= List Price x Discount Rate
= ₱1,250.00 x 15%
= ₱187.50

b. Net Invoice Price


= List Price – Discount
= ₱1,250.00 – ₱187.50
= ₱1,062.50
Another way of computing for the net invoice price (NIP) is to
multiply the list price by the net invoice price rate. The net
invoice price rate is equal to 100% less the discount rate.
Thus,
Net Invoice Price (NIP) rate = 100% – Discount Rate
NIP rate = 100% – 15%
= 85%

Net Invoice Price = List Price x NIP rate


= ₱1,250.00 x 85%
= ₱ 1,062.5
To get the discount, we deduct the
net invoice price from the list price:

Discount = List Price – Net invoice


Price
= ₱1,250.00 – ₱1,062.50
= ₱187.50
Series of Discounts

In certain instances, a seller grants


additional discounts other than the discount
ordinarily given by him/her. For instance,
aside from the regular 10% discount, a seller
may grant a special additional discount of
5%. The series of discounts is, therefore,
10% and 5%. This is not, however,
equivalent to 15% as we shall see below.
Example:
Compute for the discount and the net
invoice price if an item listed at ₱
1,250.00 is given a 10% and 5%
discount.

Given: List Price = ₱1,250.00 Discount


rates = 10%, and 5%

Find:
(a) Discount
(b) Net Invoice Price
Solutions:
Method 1
We first multiply the list price by the first discount rate. To get the
second discount, multiply the difference between the list price and the
first discount, and the second discount rate. We then deduct the second
discount from the said difference to get the net invoice price.
List price ₱1,250.00
Less 10% (₱1,250 x 10%) ₱ 125.00
Difference ₱1,125.00
Less 5% (₱1,125 x 5%) ₱ 56.25
Net Invoice Price ₱1,068.75

Our total discount rate is equal to the first discount plus the
second discount:

Total discount = ₱125.00 + ₱56.25


= ₱ 181.2
Method 2

A.Deduct the first discount rate from 100%


and multiply the list price by the rate
obtained.
100% – 10% = 90%

Multiply the list price by the first balance rate


obtained in step A.

List Price ₱1,250.00


x 90%
First Balance ₱1,125.00
B. Deduct the second discount rate from 100%
and multiply the first balance obtained in A by
the second balance rate obtained.

100% – 5% = 95%

First Balance
₱1,125.00
Second balance rate x
95%
Net Invoice Price
₱1,068.75
This method involves a process similar to the
use of the net invoice price rate (NIP rate)
applied to the list price to get the net invoice
price. Our discount is still equal to the list price
less the net invoice price.

Discount = List Price – Net


Invoice Price
= ₱ 1,250.00 – ₱
We obtained the same results as we got in
1,068.75
Method 1 = ₱ 181.25
This Photo by Unknown Author is licensed under CC BY-SA

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