The Difference Between The Sale Price And The Purchase Price - I.E. The Margin
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The margin is an accurate indicator of the profitability of the activity in the indicated period and the key indicator used to analyze profitability. Knowing what it can be used for, it is worth knowing its definitions.
What is a margin?
The margin is the difference between the selling price of a good and its purchase price, determining the surplus (profit) obtained from the sale of a good over the direct costs of obtaining it. It can be expressed as an amount or as a percentage.
The margin expressed in amounts is the difference between the selling price and the cost of the good sold. The percentage margin is the ratio of the amount margin to the selling price or cost of the good.
Margin expressed as a percentage is a very popular measure because it shows the profitability of sales. It allows you to easily compare the profitability of selling goods at different prices.
Types of margin
In the financial analysis, the margin means a financial ratio calculated on the basis of data contained in the company's financial statements. There are two types of margin: net margin and gross margin. Both categories refer to the financial statements.
Net margin
The net margin is the net profit from a given reporting period divided by the value of sales in a given period. The net margin shows how profitable the company's operations were during the period. The net margin includes the costs incurred by the company, because its calculation includes all costs, both indirect and direct.
Gross margin
Gross margin is an indicator showing how profitable the company's sales were in a given period. To calculate the gross margin, not total costs are used (as in the case of net margin), but only direct costs, i.e. sales value. In the comparative variant of the profit and loss account, generic costs are used to calculate the gross margin. Then the gross margin is calculated as follows: Gross margin% = (Sales - Costs by type) / Sales. In the calculation variant, costs by type are replaced by the cost of manufacturing the products sold.
Do not confuse the margin with the mark-up on the purchase price of the goods. The margin is the profit on sales in a currency (e.g. in EUR) divided by the selling price. The overhead means the profit from the purchase.
However, it is possible to calculate the margin (gross or net) not only on the basis of financial statements. The margin can also be calculated for the sale of individual product categories, individual products or company branches. Calculating the margin is possible where appropriate costs can be identified and allocated to individual sales revenues.
Margin and overhead
We often confuse the concept of margin and mark-up, although they mean something completely different. The mark-up is the percentage surplus of the price over the production (purchase) cost related to this cost, used to cover fixed costs and profit. A slightly different approach to this issue is the profit margin, which is expressed as a percentage surplus of the price over the cost of production related to the price. So what is the relationship between margin and mark-up? The point is that knowing one of these values, you can calculate the other. The margin is the markup divided by the sum of the markup and 100%, and the markup is the markup divided by the difference of 100%. and margin. For example: A mark-up of 25%. is equivalent to a margin of 20%. How is the overhead calculated? The pattern for the bedspread looks like this:
Mark-up (%) = sale price in EUR/purchase cost in EUR – 100%. = (sales price in EUR – purchase cost in EUR)/ purchase cost in EUR.
The mark-up is used to determine the selling price in stores, where it is calculated as the sum of the purchase cost and the product of the purchase cost and the mark-up.
Incorrect use of the concepts of margin and mark-up can lead to communication misunderstandings, and consequently to incorrect interpretation of the company's financial results, as well as to misunderstandings in communication with the client.
Source: Begg D. (2003), Mikroekonomia
