My MBA professors would probably take my degree back if they see this post...

Ok, I am in a heated debate with my co-workers about markup. Citing an example:

Company A sells Product Z to Company B for $10/unit. Company A's Presidents decides to increase the price by 10% due to various reasons. What formula would you use to calculate the markup?

$10 multiply by 1.1

OR

$10 divide by 0.9

?????? ??????

My answer is multiply by 1.1

However my co-worker says he divides by 0.9

The difference in this case is only 1%, but if you take 50% then the difference is night and day.

What is your opinion?

 

Mingster,

If you use your co workers formula then you are not increasing by 10%, you are increasing by 11.1%. So, with his you will get a higher number, but the percentage increase will not be correct.

 

the correct way is no doubt your method.

PriceA * 1.n will always yield the proper increase.

in the case of your friend:

his logic should be PriceA / ( 1/ (1+n) ) which in the case of your example would be:

.909090909_ which is not equal to .9

this example just made him look right, choose a larger increase and you will see his error magified.

I hope this is right, i really didn't proofread it very well

Matt

 

I've always done what your colleague does, divide by 0.9 and when discounting, multiply by 0.9... when dividing by 0.9, you get a higher price! Good for seller, bad for customer...

 

You're correct, Mingster.

The problem about which your co-worker is probably thinking is one like this:

A produce is discounted by 10% and the new price is $10. What was the original price?

To discount by 10% you multiply by (1 - 0.1) = 0.9. To undo that effect and get to the original price, you must divide by 0.9, ondoing your original multiplication.

 

The traditional meaning of 10% markup is "10% of the selling price is markup" so your colleague is correct. If you multiply by 1.1 then you are adding 10% to the wholesale price, but you don't have "10% markup" according to the usual meaning.

I first came across this when a distributor acting as an agent for my company in Japan had a policy of "60% markup". I thought this was reasonable enough (in that market) but my understanding that this meant they increased our price by 60% was not correct. It meant that 60% of the final selling price was markup, an increase of 150% over our price! This, I later learned, is the perfectly normal and widely understood meaning of the word "markup".

 

[QUOTE]Originally posted by naishou
[B]The traditional meaning of 10% markup is "10% of the selling price is markup" so your colleague is correct.

 

You are right of course, but the president may have been thinking "10% markup" and saying something else (loose with his words). Chances are he didn't really understand what he was saying and just applying convention.

 

Thanks for all the information guys!

Just using the example:

1. Company A does not sell retail.
2. "Markup" was not a word used.

The problem is further compounded by the fact that I'm translating the example from Chinese into English.