PDA

View Full Version : Counterintuitive Math Everyone but Me Understands



Tog
2008-Oct-22, 11:08 AM
This has to do with profit margins and retail mark up.

Part of the fallout from catching my supervisor skimming from the till is a drive to make the whole place more secure. Basically, we've been open for 4 years, it's time to act like a real business. Because of this, a lot of stuff has fallen to me to fix/do, mostly through spreadsheets.

Here is the thing I don't get though. I've never gotten it. They did it this way at the store, and at my dad's gun shop.

If something costs 1 dollar, and sells for 2 dollars, what is the mark up? In my mind it's 100% since the price is 100% more than the cost. Somehow the "right" answer in the retail world is 50% mark up. I think.

It's something like (retail-cost)/cost, but that's not right, since in the example, it would still make it (2-1)/1, or 100% The adding machine that has these functions says 50%.

WHY? why does it say that?

Please. Teach me to fish...

Whirlpool
2008-Oct-22, 11:52 AM
Mark-up is the percent you add to the Unit Cost . It is also called AFAIK Profit Margin.

Percent Mark Up is the one you use for business to compensate the expenses in running the store.

So if your Unit Cost is $1 and you added a 100% Mark Up , that means :

$1 + $1 x 100% or 1 = $2 is your Selling Price

But if your Mark up is 50% that will be :

$1 + $1 x 50% or 0.5 = $1.50 is Selling Price.

Tog
2008-Oct-22, 12:03 PM
Okay, that's the way I think it should be, but it's not. The adding machine on the desk here, has buttons to figure this for me. Here are some values. Put in any two and you get the third as an answer.

Cost= 1
Sell= 2
Margin= 50%

Cost= 1
Sell= 1.5
Margin= 33.33%

Cost= 1
Sell= 5
Margin= 80%

What it seems to be doing is taking (Sell-Cost)/Sell

What I don't understand is why that should ever be correct.

NEOWatcher
2008-Oct-22, 12:22 PM
This sounds to me like a terminology problem.

Tog; does your calculator specifically say "margin"? That is not markup.

Markups are cost based, margins are income based. There's plenty of accounting elements that make this line very grey, but this is where it starts.
Thus;
A 1$ cost item sold at $2 is...
100% markup
50% margin.

Edit: BTW
I think where most people make the mistake is when they are talking Percents instead of dollars.
The $1 above is both a markup and a margin. It doesn't matter until you use it for some kind of comparison. That's where profit comes in.
Call $1 the profit. Compare it to the sales, and it's a margin.

sales - cost = profit
profit / cost = markup
profit / sales = margin

I'm going to go out on a limb with this thought:
This is why profit is usually used in connection with margin, because you normally don't have profit until there is sales. Markups can be determined pre-sale. There's no money yet, so the markup is just a pre-sales value.

megrfl
2008-Oct-22, 12:33 PM
Okay, that's the way I think it should be, but it's not. The adding machine on the desk here, has buttons to figure this for me. Here are some values. Put in any two and you get the third as an answer.

Cost= 1
Sell= 2
Margin= 50%

Cost= 1
Sell= 1.5
Margin= 33.33%

Cost= 1
Sell= 5
Margin= 80%


What it seems to be doing is taking (Sell-Cost)/Sell

What I don't understand is why that should ever be correct.

Selling price minus cost = $gross profit

Gross profit divided by selling price = gross profit %

So a selling price of $5.00 dollars minus cost of $1.00 equals $4.00 dollars gross profit.

Now take the gross profit of $4.00 and divide by $5.00 selling price and that is your gross profit percent.

That is the formulas you are showing above. Is that what you are trying to find?

PraedSt
2008-Oct-22, 01:30 PM
Hi, Neo's right. It's partly terminology confusion.

Use Cost price as the denominator for Mark-up, and Retail price as the denominator for Margin.
The numerator should always be (Retail-Cost).

Tog
2008-Oct-23, 07:35 AM
Okay. I get it now. What had me confused was the bosses at the store would say things like "We're making 50% on that, when the retail was double the cost. I just couldn't get past that. I see that it's really, "of the $2 we get, 50% is profit" now. Thanks.

The current spreadsheet problem is tracking everything possible about the items in the vending machines. A huge part of the problem is that I have to set up the sheet so that the person entering the data can actually do it. Her previous experience with computers is somewhere just above "my son helped me check my e-mail once". I need to set it up to where she just puts in the quantities and presses the "done" button to run the macros. Having the right formulas will probably really help. :)

djellison
2008-Oct-23, 01:28 PM
What it seems to be doing is taking (Sell-Cost)/Sell

What I don't understand is why that should ever be correct.

Basically, it's a value that describes what percentage of the shelf price, is markup.

Doug

Whirlpool
2008-Oct-24, 05:00 AM
Okay. I get it now. What had me confused was the bosses at the store would say things like "We're making 50% on that, when the retail was double the cost. I just couldn't get past that. I see that it's really, "of the $2 we get, 50% is profit" now. Thanks.

The current spreadsheet problem is tracking everything possible about the items in the vending machines. A huge part of the problem is that I have to set up the sheet so that the person entering the data can actually do it. Her previous experience with computers is somewhere just above "my son helped me check my e-mail once". I need to set it up to where she just puts in the quantities and presses the "done" button to run the macros. Having the right formulas will probably really help. :)


Sure you now know how to make those formulas on the Excel spreadsheet , right ?

Tog
2008-Oct-24, 07:21 AM
If I know what it is, I can get it in right. I was just confused because everyone I worked for was calling something one thing when they should have been calling it something different. in my mind ,we're not "making" 50% on an item that sells for 2 but cost us one. The money spent is being doubled, so we are "making" 100%.

At the end of the day, when we look in the box and see that we have $200. We know that it cost us 100 to make that, so the profit was 50% of the total. That's where I was confused.

As for using Excel, I think I've got a pretty good handle on it. I wrote the sheet that we use at the hotel form tracking housekeeping and it comes in at around a half meg. It even has a bug report feature that sends any issues to me in a centralized sheet that I can use to collect any issues with all the sheets I do here. My current problem isn't in knowing how to make it do what I want it to, it's in knowing what I want it to do in the first place.:)

Whirlpool
2008-Oct-24, 07:59 AM
Well, I think , the way to resolve your dilemma is to ask your Boss about it. He is the position to explain to you the Importance of it since he runs the business.


;)

Tog
2008-Oct-24, 08:36 AM
Well, I think , the way to resolve your dilemma is to ask your Boss about it. He is the position to explain to you the Importance of it since he runs the business.
;)

Sorry, I choked a bit on my cereal.

Yes, he does run it, but he runs it by getting people who know more than he does about certain parts to do stuff he knows he can't. This is why I get to make these things. He can make a sheet that looks pretty and does some basic things, but stuff like "If" statements in formulas are outside of his comfort zone.

He's told me what he wants it to do, but he really wouldn't know how to go about actually doing it himself. Sort of like how I wouldn't have the first clue how to cut into the wall and fix a leaking pipe, which is where his strengths lie.

I'm really confident in saying that there is no one else where I work that would be able to do this stuff at this time. Not that I consider myself an expert by any stretch, I'm just way out ahead of the rest of the staff when it comes to this type of thing. Sort of like being he tallest kid in the 3rd grade doesn't make you a giant.:lol:

Whirlpool
2008-Oct-24, 08:47 AM
Ohh , I see.

mugaliens
2008-Oct-24, 11:14 AM
Here is the thing I don't get though. I've never gotten it. They did it this way at the store, and at my dad's gun shop.

If something costs 1 dollar, and sells for 2 dollars, what is the mark up? In my mind it's 100% since the price is 100% more than the cost. Somehow the "right" answer in the retail world is 50% mark up. I think.

If somethng costs a dollar, and sells for 2 dollars, that's a 100% markup (http://en.wikipedia.org/wiki/Markup_(business)). That would also be a 50% profit margin. If they're calling this a "50% markup," they're wrong.

Like many, you're confused by the difference between "mark-up" and "profit margin."

They're easy to explain.

Mark-up is when the price is set at a pecentage above cost. Thus, it costs the store $10 for a box of shells. The store has a 20% mark-up policy. Thus, the retail price is $10 x 1.20, or $12.00. The formula is given by:

Retail = Cost (1 + MU), where the MU (mark-up) is given in percent

Profit margin is when the price is set so that a known percentage of profit is achieved on every sale. Thus, to achieve a 20% profit margin, that same $10 box of shells would require a retail price of $12.50. The formula is simple:

Retail = Cost / (1 - PM), where the PM (profit margin) is given in percent.

It's something like (retail-cost)/cost, but that's not right, since in the example, it would still make it (2-1)/1, or 100% The adding machine that has these functions says 50%.


WHY? why does it say that?

Please. Teach me to fish...

You have been taught, my paduian fisherman. Now, go fish.

:lol:

NEOWatcher
2008-Oct-24, 12:55 PM
...in my mind ,we're not "making" 50% on an item that sells for 2 but cost us one. The money spent is being doubled, so we are "making" 100%.
The problem isn't in the "making" it's in the designation of the number.
Making $x is fine... its an absolute.
Making x% is a bit more... it's relative.
Once you go into a relationship, you need a significant other. The rest of the statement you make implies who that significant other is. Since there is no standard choice, there needs to be some context of that choice before there is an agreement on what it means.
In other words... When speaking %, it is vital to say "of what".

Whirlpool
2008-Oct-24, 05:02 PM
Once you go into a relationship, you need a significant other. The rest of the statement you make implies who that significant other is. Since there is no standard choice, there needs to be some context of that choice before there is an agreement on what it means.

That's a good explanation Neo.

:)