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If I want a gross margin of 25%, what percent should I mark up my product?

Author:
Harold Averkamp, CPA, MBA

Definition of Gross Margin

Gross margin as a percentage is the gross profit divided by the selling price. For example, if a product sells for $100 and its cost of goods sold is $75, the gross profit is $25 and the gross margin (gross profit as a percentage of the selling price) is 25% ($25/$100).

Example of Calculating the Markup on Cost to Earn a Specified Gross Margin

Since you know the cost of a product and you know the gross margin percentage to be achieved, you can determine the selling price and the markup needed.

Let’s begin by assuming that a company’s product has a cost of $75 and the company desires a 25% gross margin (or 25% of the selling price). Let’s use “SP” to indicate the product’s required selling price and “MU$” to represent the gross profit, and state the gross margin as 0.25SP. This means that:

  • SP = Cost + MU$
  • SP = $75 + MU$
  • Since MU$ must be 25% of SP, we can state: SP = $75 + 0.25SP
  • Restating the previous point, we have: SP – 0.25SP = $75
  • Restating the previous point, we have: 0.75SP = $75
  • After dividing each side of the equation by 0.75, we have: SP = $100

With a selling price of $100 and a cost of $75, the $25 markup as a percentage of the $75 cost is 33.33% ($25/$75). The gross profit of $25 ($100 – $75) also means a gross margin of 25% ($25 gross profit divided by the selling price of $100).

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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