Difference Between Markup and Gross Profit

Markup and gross profit are both terms that play a role in planning and operating a business. While these terms sound similar, the differences between them must be understood to develop sound financial plans and measure the business's progress.

Markup

Markup is the measure of how much the cost of an item is increased to arrive at a sales price. Markups are typically discussed in terms of percentages, using the cost and final retail price of an item as reference points.

Example of Markup

For example, an item that costs a business $20 to purchase, which the business retails for $30, has a 50 percent markup. The same item, if sold for $40, would have a 100 percent markup.

Gross Profit

The gross profit of an item is the portion of the final selling price that is profit. The gross profit does not take into consideration costs of doing business. Rather, it is a measure of how much money is generated by the sale of an item for the business to use toward all of its operating expenses.

Example of Gross Profit

In the above examples, the item with a 50 percent markup created 10 in gross profit, and the item with 100 percent gross margin generated $20 in gross profit.

Terms in Action

When setting sales goals, the markup that a business puts on an item multiplied times the number of times the item sells in any period, for example a month, will give the business an idea of the gross profit they will have available. The gross profit is then used to purchase more inventory, pay overhead and salaries, pay for business operating expenses and reserve as company profits.

References

• Calculating gross profit
• Using Markup

Resources

• Financial analysis tools