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

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%.