How to Calculate the Selling Price of an Item

Categories: Accounting and Bookkeeping, Business Management | Posted: October 26, 2011 | 3 Comments »

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

Questions, corrections, or comments? Please leave a comment below.

 

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JamesLeichter

3 Responses to “How to Calculate the Selling Price of an Item”

  1. Ron Says:

    How long has this site been available? This information is great. I am telling my two sons to make this website required reading. I am in the HVAC and plumbing business. I couild have made more money and prevented a lot of losses had you been around earlier. Anyway. Thank you. -Ron

  2. Robert Says:

    I agree with the guy above. This topic was just what I was looking for when I stumbled across the site. Great info. I do have a question. Should all parts be marked up the same? Thank you.

  3. JamesLeichter Says:

    No. All parts should not be mark up the same int he service department. Please see our parts multiplication sheet on this website.

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