What is a Markup?
The Markup Price is the difference between a product’s average selling price (ASP) and the corresponding unit cost, i.e. the cost of production on a per-unit basis.
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How to Calculate Markup Price
The markup price represents the average selling price (ASP) in excess of the cost of production per unit.
- Average Selling Price (ASP) → The simplest approach to calculating a company’s ASP is to divide a company’s revenue by the total number of units sold, but if the product line consists of a broad range of products with large variances in pricing (and volume), the recommended approach is to calculate the ASP on a per product category basis.
- Average Unit Cost → The average unit cost is the cost of production on a per-unit basis, and the metric is inclusive of any costs associated with the production process (i.e. sum of all production costs divided by the number of units sold).
Calculating the markup price is a rather straightforward process, as it simply involves:
- Calculate the Average Selling Price (ASP)
- Calculate the Average Unit Cost
- Subtract the Average Selling Price (ASP) by the Average Unit Cost
Markup Price Formula
The formula for calculating the markup price is as follows.
In order to make the markup price metric more practical, the markup can be divided by the average unit cost to arrive at the markup percentage.
The markup percentage is the excess ASP per unit (i.e. the markup price) divided by the unit cost.
Since all companies seek to improve their operating efficiency and profit margins over time, management must set prices accordingly to ensure they are on track to become more profitable.
