The two formulas
Gross profit is selling price minus the directly attributable cost of the sale. Gross margin is gross profit divided by selling price. Markup is gross profit divided by cost. Multiply either ratio by 100 to express it as a percentage. Neither figure, by itself, tells you net profit after overhead, financing and other business expenses.
Worked example: a product costing 60
If an item costs 60 and sells for 100, gross profit is 40. Gross margin is 40 divided by 100, or 40%. Markup is 40 divided by 60, approximately 66.7%. A 40% markup would instead produce a price of 84 and a gross margin of approximately 28.6%. The labels are not interchangeable.
Work backward from the target
To calculate a price for a target gross margin, divide cost by one minus the target margin expressed as a decimal. For an illustrative cost of 60 and target margin of 40%, price is 60 ÷ 0.60 = 100. A target at or above 100% is not valid for this formula when cost is positive.
- Use comparable tax treatment for cost and price.
- Include directly attributable labour, delivery and selling costs where relevant.
- Do not treat owner time as automatically free.
- Check whether discounts change the actual selling price.
Discounts come out of gross profit
If the same item sells for 90 after a discount while cost remains 60, gross profit falls from 40 to 30. That is a 25% reduction in gross profit, despite only a 10% price reduction. More volume may or may not make up the difference, especially if additional sales require more delivery effort or support.
Use the number with commercial judgment
A formula establishes the relationship between cost and price; it does not prove customers will pay that price. Compare delivery capacity, market alternatives and the value of the offer. Review realized margins after returns and discounts rather than relying only on list prices. Ask an accountant to align your cost definitions with financial reporting.