# How do you compute a selling price if you know the cost and the required gross margin?

Author:
Harold Averkamp, CPA, MBA

## Definition of Selling Price

A selling price is the amount that a customer will pay to buy a product. If a retailer wants to earn a positive gross margin (or gross profit percentage), the selling price must include an additional amount that is added to the retailer’s cost of the product. This additional amount must be sufficient to cover the retailer’s selling, general and administrative expenses and some profit.

## Example of Computing a Selling Price

Let’s use the following information:

• SP represents the Selling Price that the customer will pay
• C represents the retailer’s cost of the product
• GP\$ represents the product’s Gross Profit in dollars
• GM represents the product’s Gross Margin
• SP – C = GP\$

If a retailer wants to earn a GM of 40%, it means that the GM needs to be 40% of SP, or 0.4SP. Therefore, the product’s SP = C + 0.4SP.

Let’s assume that a retailer’s cost of a product is \$100, thus CP = \$100. This means that SP = \$100 + 0.4SP. Restating this we have 0.6SP = \$100. Which means SP = \$166.67.

Now let’s verify that the selling price of \$166.67 is correct. A selling price of \$166.67 minus its cost of \$100.00 equals a gross profit of \$66.67. The gross profit of \$66.67 divided by the selling price of \$166.67 = a gross margin of 40%.

Join PRO to Track Progress

• Perform better at your job
• Get hired for a new position

#### Earn Our Certificates of Achievement

• Debits and Credits
• Financial Statements
• Balance Sheet
• Income Statement
• Cash Flow Statement
• Working Capital and Liquidity
• Financial Ratios
• Bank Reconciliation
• Accounts Receivable and Bad Debts Expense
• Payroll Accounting

#### PRO Plus

Features
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Bookkeeping Study Guide
Managerial Study Guide
All PDF Files
Progress Tracking
Certificate - Debits and Credits
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Accounts Receivable and Bad Debts Expense
Certificate - Payroll Accounting