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

## 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). ### Free Financial Statements Cheat Sheet

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