The margin, markup and breakeven point calculations are three of the most important values to know when running a business. It determines if you are making money from your business and also helps you plan for business survival and success. It can also help to take the guesswork out of future business decisions.
This article will give step-by-step instructions on how to calculate margin, markup and breakeven point. Company A will be used as an example in this article to better explain the concepts.
GROSS MARGIN
Gross margin is money left after subtracting the cost of the goods sold from the net sales and can be a rand value (gross profit) or a percentage value
Formulas
Gross Profit = Net Sales – Cost of Goods Sold
Gross Margin (percentage value) = (Gross Profit / Net Sales) x 100
Once you have your gross margin, you can calculate your net margin.
Example: Company A
Gross Profit: R52 000 – R31 200 = R20 800
Gross Margin: R20 800 / R52 000 x 100 = 40%
Company A has a gross profit of R20 800. The business’s overhead expenses must be less than this to earn a profit.
NET MARGIN
Net margin is your profit before you pay any tax (tax is not included because tax rates and tax liabilities vary from business to business).
Formula
Net Profit = Net Sales – Cost of Goods Sold + Overhead Expenses
or
Net Profit = Gross Profit – Overhead Expenses
Net Margin = (Net Profit / Net Sales) x 100
If the net margin is 10%, then for every rand of goods sold, Company A will make 10 cents in profit before tax – after all the cost of goods and overhead expenses have been paid.
Example: Company A
Net profit: R20 800 – R15 600 = R5 200
Net margin: R5 200 / R52 000 x 100 = 10%
Company A will earn 10% of R52, or R5.20 from every product sold.
MARKUP
Markup is the amount of money you sell your product for to cover the cost of goods plus overhead expenses, and allow for profit to be earned.
Formula
Markup % = Sales less Cost of Goods Sold) / Cost of Goods Sold x 100
or
Markup % = (Gross Profit/Cost of Goods Sold) x 100
Example: Company A
Markup: (R52 000 – R31,200) / R31 200 x 100 = 66.67%
Company A’s markup percentage is 66.67%.
To reach the gross profit of R20 800 by selling a product with a cost price of R31.20, Company A will need to multiply the unit cost price by the markup percentage (R31.20 x 1.6667 = R52.00).
Each product will have a minimum price of R52.00 each to earn enough money to cover business expenses.
BREAKEVEN POINT
The breakeven point identifies the number of sales to be made (in rand value or units), before profit begins. If you know the unit’s sale price, cost price and the business operating expenses you can calculate the number of units you need to sell before you start making a profit.
Formula
Breakeven (rand value) = Overhead expenses / (1 – (Cost of Goods Sold / Total Sales))
Breakeven (number of units to be sold) = Overhead expenses / (Unit selling price – unit cost to produce)
Example: Company A
Breakeven rand value: R15 600 / (1 – (R31 200 / R52 000)) = R39 000
Breakeven number of units to sell: R15,600 / (R52 – R31.20) = 750 units
Company A will need to sell R39 000 worth of products – or 750 units – before the business earns any profit (before tax).
This article is based on a webpage by Business Victoria.
