Difference Between Mark Up and Gross Profit

People are often getting confused with mark-up and gross profit. A mistake on this could cost a company dearly. The difference between the two could be described as follows:

• Mark up - the margin or amount added to the cost price of an article/product that will make up the selling price of that product divided by the cost of that product.
• Gross Profit - the gross income for products sold divided by the selling price for the product.

Example:

Cost price of product:      R120.00

Selling price:                      R200.00

In our normal Income Statement format, the gross profit will be:

Sales:                                  R200.00

Less cost of sales:            R120.00

Gross profit:                    R 80.00

Gross profit margin will be: R80.00 ÷ R200.00 = 0.40 or 40%

Mark-up will be:                     R80.00 ÷ R120.00 = 0.67 or 67%

It is therefore clear that a mark-up of 67% on cost price only gives us a gross profit of 40%.

The mark-up percentage will always be higher than the gross profit margin.