Margin and markup both link gross profit to a base, but the base is different. Margin uses sales; markup uses cost of sales. Choosing the wrong base is the most expensive slip in this topic.
This lesson belongs to incomplete records and works with inventory and cost of sales.
What is the base for each?
Gross profit equals sales less cost of sales. Margin divides gross profit by sales. Markup divides gross profit by cost of sales.
So a 25% markup means a selling price of 125% of cost, and a 20% margin means cost of 80% of sales. These describe the same pricing from two angles. Write the relationship at the start of your working before using any number.
Step by step
- Find the base: sales (margin) or cost (markup).
- Write the base as 100% and the rest in terms of it.
- Use the one amount you know: either sales or cost of sales.
- Calculate the missing amount and then gross profit.
- Check backwards: divide profit by the base to see the stated percentage again.
Worked example
Kedai Elektrik Jaya has opening inventory of RM4,000, purchases of RM36,000 and closing inventory of RM6,000. The owner says goods are sold at a markup of 25% on cost. Sales records are missing.
Cost of sales: 4,000 + 36,000 − 6,000 = 34,000.
Sales: cost is 100% and sales are 125%, so 34,000 × 1.25 = RM42,500.
Gross profit: 42,500 − 34,000 = RM8,500.
Check: 8,500 / 34,000 = 25% markup, and 8,500 / 42,500 = 20% margin. Both agree with each other.
The mistake to watch for
A slip that looks reasonable is to divide cost by 75% when the markup is 25%.
Mistaken working: 34,000 / 0.75 = 45,333
The student treated 25% as a margin on sales. That is a different statement, and it inflates sales by about RM2,833.
The correction is to ask what the percentage is “on”. Markup 25% on cost means multiply cost by 1.25. Margin 25% on sales means cost is 75% of sales, so divide cost by 0.75.
The same words, two different bases, two different answers.
Check yourself
1. Cost of sales is RM18,000 and markup is 50% on cost. Find sales and gross profit.
Show answer
Sales = 18,000 × 1.5 = RM27,000. Gross profit = 27,000 − 18,000 = RM9,000.
2. Sales are RM60,000 and gross margin is 40%. Find cost of sales and the markup.
Show answer
Gross profit = 60,000 × 0.40 = 24,000. Cost of sales = 60,000 − 24,000 = RM36,000. Markup = 24,000 / 36,000 = 66.7% (to one decimal place).
3. Opening inventory RM3,000, purchases RM27,000, sales RM36,000 at a margin of 25% on sales. Find closing inventory.
Show answer
Cost of sales = 36,000 × 0.75 = 27,000. Goods available = 3,000 + 27,000 = 30,000. Closing inventory = 30,000 − 27,000 = RM3,000.
Where this leads next
Margin and markup can also find stock lost in a fire or theft, as the practice set shows. Next, look at a different route to profit: infer profit from net-asset movements with drawings. The percentage-base explorer helps you see how the base changes the answer.
When a student knows the formulas but chooses the wrong base, a short conversation about their own working usually reveals why. That is part of our online one-to-one Accounting tuition.