Whether you're a consumer trying to figure out the final price of a sale item or a business owner setting retail prices, understanding discounts and markups is essential.
Calculating Discounts
A discount is a reduction in the original price of an item. To calculate the final price after a discount:
- Convert the discount percentage to a decimal (e.g., 20% = 0.20).
- Multiply the original price by the decimal to find the discount amount.
- Subtract the discount amount from the original price.
Shortcut: Alternatively, you can subtract the discount percentage from 100% to find the "percentage you pay." For a 20% discount, you pay 80% (100% - 20%). Multiply the original price by 0.80 to get the final price directly.
Calculating Markups
A markup is the amount added to the cost price of goods to cover overhead and profit. It is usually expressed as a percentage of the cost price.
- Convert the markup percentage to a decimal (e.g., 50% = 0.50).
- Multiply the cost price by the decimal to find the markup amount.
- Add the markup amount to the cost price to find the selling price.
Shortcut: Add 1 to the decimal markup percentage and multiply by the cost. For a 50% markup, multiply the cost by 1.50.
Markup vs. Margin
It's crucial for business owners to understand the difference between markup and profit margin. Markup is a percentage of the cost, while margin is a percentage of the selling price. A 50% markup on a $10 item results in a $15 selling price. The profit is $5. The profit margin is $5 / $15 = 33.3%.