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11 Why do I need to calculate my margin differently than my markup? When we calculated markups, we simply multiplied the cost by 1 + the markup percentage. So then why are we dividing to calculate a profit margin? The answer is because there is a difference between a markup and a margin. A markup is specific to the cost of the item. A margin is specific to the price of the item. Let s look at what would happen to our example above if we tried to use the multiplication formula: Our costs were \$18,000 and we wanted a 10% profit margin. \$18,000 x 1.1 = \$19,800. Notice the difference? When we calculated the profit margin using the margin formula (divide by 1 desired profit margin) our price was \$20,000. The formula to calculate a profit margin is: (Selling Price Cost) Selling Price (\$20,000 - \$18,000) \$20,000 =.1 or 10% We can see by this equation that our formula for profit margin (using division) and our formula for a markup (using multiplication) came up a bit short. Why did this happen? Because the markup formula calculates 10% of the cost and adds it to the total costs. To calculate a profit margin, you want to add 10% of the eventual selling price to the cost. The margin formula enables you to do this. 2

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