Margin, markup and break-even in plain terms
Gross margin is the part of each sale you keep after the cost of what you sold, as a share of the selling price. Markup is the same profit as a share of the cost. The profit is identical, so the two only differ in what they are divided by: a product bought for $30 and sold for $50 earns $20, which is a 40% margin and a 66.7% markup. Mixing them up is the most common pricing mistake, and it matters when a lender or an auditor reads a margin and you meant a markup.
Break-even is the point where sales cover all costs. Each unit sold contributes its price minus its cost toward the fixed costs; break-even units are the fixed costs divided by that contribution. For financial reporting, gross margin by product line and period is a common analytical procedure for an auditor (AU-C 520), so unexplained shifts in margin tend to get questions. What counts as cost of goods sold follows the entity's inventory costing under ASC 330.
Common questions
What is the difference between margin and markup?
Margin is profit divided by the selling price. Markup is profit divided by the cost. For a $50 price and a $30 cost, profit is $20: the margin is 40% and the markup is 66.7%.
How do I calculate the price from a margin?
Price = cost ÷ (1 − margin). With a $30 cost and a 40% margin, price = 30 ÷ 0.6 = $50. From a markup, price = cost × (1 + markup).
How is the break-even point calculated?
Break-even units = fixed costs ÷ (price − cost per unit). Break-even sales are those units times the price, or fixed costs divided by the contribution margin ratio, which is (price − cost) ÷ price.
What goes in cost per unit?
Costs that rise with each unit sold: materials, direct labor, freight, payment fees. Costs that stay the same however much you sell, such as rent or salaried staff, belong in fixed costs.
What is margin of safety?
How far expected sales are above break-even, as a share of expected sales. A margin of safety of 20% means sales can fall 20% before the business starts losing money, on these assumptions.
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