Here we are going to look at three metrics for single-sale transactions: gross profit margin, gross profit, and markup. All three formulas relate the actual cost of a good or service to the selling price of a good or service (revenue).
Gross profit margin, sometimes referred to as “gross margin,” is a profitability ratio that measures the proportion of revenue left over after accounting for the actual cost of a good or service.
Gross profit, also a profitability measure, calculates the difference between revenue and the actual cost of the good or service. You can think of gross margin as the amount of profit you earn from a good or service before netting out any other expenses.
Markup is the difference between the selling price and the actual cost of a good or service as a percentage above the actual cost.
You can calculate gross profit margin and gross profit of a business over a certain period of time, or you can calculate these metrics on a per sale basis. In the examples below, I will work with the single sale of an item, but the steps would be the same if you are working with a period of sales.
Suppose you bought a widget directly from a manufacturer for $100. Next, you turn around and sell that widget to the consumer for $120. What is your gross profit margin, gross profit, and markup?
For all three calculations, we can plug in our numbers directly to the formulas. For gross profit margin, we simply find the difference between selling price and cost price, and then we divide that value by the selling price.
For gross profit, it’s even easier. We simply find the difference between selling price and cost price.
For markup, the calculation is almost the same as gross profit margin, yet rather than dividing by sale price, we divide by cost price.