Marketing Math – Additional Example Problems

(after session 2 on this topic)

  1. I manufacture ceramic mugs that cost $2 to produce. I sell them for $15 per mug. Calculate markup on cost and margin on price.
  2. I produce dolls that cost $8 in direct materials and labor. My fixed costs are $25,000, and I expect to sell 10,000 dolls. I retail the dolls for $15 per doll. Calculate markup on cost and margin on price.
  3. I sell sweaters that cost $5 to make, and I retail them for $100 each. Calculate markup on cost and margin on price.

ANSWERS

  1.  Markup on cost: first, I must calculate markup or margin in dollars (retail price – total cost): $15-$2 = $13

I then take the markup on cost as a percentage of the total cost: 13=2x

x=650%

This means, of the $2 it costs me to produce, I am marking it up by 650% to arrive at the retail price of $15.

Margin on price: I use the markup/margin in dollars and find it as a percentage of retail price.

13=15x

x=86.67%

This means, of the $15 I generate in revenue, I keep 86.67% in margin.

  1.  Markup on cost: I must first find total cost. Variable costs are given (direct materials and direct labor), but we must calculate fixed costs per unit. We find this by taking total fixed costs and dividing it by the total number of units ($25,000/10,000)=$2.5. So, total costs are variable costs + fixed costs per unit–>$8 + $2.5 = $10.5.

Now, we have to calculate our markup/margin in dollars. To do this, we take our retail price and subtract our total costs from it. $15-$10.5=$4.5.

From here, we take our markup in dollars and express it as a percentage of cost: $4.5=10.5x

x=42.86%

This means, of the $10.5 it takes us to produce the doll, we are marking it up by 42.86% to arrive at our retail price of $15.

Margin on price: To find this, we take the markup in dollars and express it as a percentage of price: $4.5=15x

x=30%

This means that of the $15 we generate in revenue, we keep 30% of it in margin.

  1. Markup on cost: Since total cost is given, our first step is to calculate our markup in dollars. ($100-$5=$95)

We take the markup in dollars and express it as a percentage of cost: $95=5x

x=1900%

This means that of the $5 it takes me to produce the sweater, I am marking it up by 1900% to arrive at the retail price of $100.

Margin on price: To calculate this, I take the markup in dollars and express it as a percentage of price. 95=100x

x=95%

This means that of the $100 we generate in revenue, we keep 95% of it in margin.