How do you compute a selling price if you know the cost and the required gross margin?
To compute the selling price, let's assume that a product has a cost of $100 and the seller wants to have a 30% gross margin on its selling price, or 30% of SP. The relationship between a selling price, cost, and gross margin or gross profit is: SP - cost = gross profit or gross margin. If the gross margin is 30% of SP, the cost of $100 will be 70% of SP.
Algebra allows us to compute the selling price as follows:
SP - cost = gross margin
SP - $100 = 30% of SP
1SP - $100 = 0.3SP
1SP - 0.3SP = $100
0.7 SP = $100
0.7SP/0.7 = $100/0.7
SP = $142.85.
To verify that a selling price of $142.85 will give us the correct gross margin, we subtract the cost of $100 from the $142.85 selling price. The result is a gross profit of $42.85 which when divided by the selling price gives us the required gross margin of 30% ($42.85/$142.85 ).