Calculating the Selling Price With a Known Gross Profit Margin.
We are often asked how to calculate a proper retail price on parts and materials when the desired gross profit margin is known. For example, you know how much you pay for an item and you know what your gross profit margin needs to be to make a profit, how much do you charge for that item?
Here is how to calculate the retail price when you already know what gross profit margin you need or want. The formula for determining an item’s selling price when you know the desired gross profit margin is: Selling Price = (Direct Cost / (100, Desired Gross Profit)) * 100
Selling Price Calculation Example
Let’ say we have a $2.00 pipe fitting that we need to achieve a gross profit margin of 65% on. Here are the steps to calculate the correct selling price. By the way, a 65% gross profit margin on a two dollar item is very reasonable and below what many hardware stores are at.
Step One: 100, 65 = 35
Step Two: $2.00 divided by 35 = .05714
Step Three: .05714 x 100 = $5.71
You will need to sell the $2.00 item for $5.71 for a gross profit margin of 65%.
Item Markup Notes
- Gross profit is the price you sell it for less the price you paid for it.
- Gross profit margin is gross profit dollars expressed as a percentage.
- Sales tax is never figured in the retail price of an item but it may be considered part of the direct cost if your company does not collect sales tax on that item. The same may be said for other costs of acquiring the item such as shipping or freight. This is discretionary.
- Notice that there is a difference between item markup and gross profit margin. If you markup an item 65%, your gross profit margin would be 60%. If you markup and item 25% (item price times 1.25), your gross profit margin would only be 20%. Please also see: Gross Profit Margin versus Markup and Calculating Gross Profit Margin
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