The formulas behind pricing, profit and break-even, explained without a finance degree or a consulting retainer.
Profit margin = (profit / revenue) x 100. Gross margin stops at cost of goods sold; net margin keeps going until there's nothing left to subtract. Formulas and worked examples included.
Read →Markup is profit as a percentage of cost. Margin is profit as a percentage of selling price. A 50% markup works out to a 33% margin, which surprises most people the first time. Formulas and conversion table.
Read →Break-even point (units) = Fixed Costs / (Price - Variable Cost per unit). Revenue version: Fixed Costs / Contribution Margin Ratio. The formula is simple; knowing your actual fixed costs is the harder part.
Read →ROI = (Net Profit / Cost of Investment) x 100. A $10,000 investment returning $13,000 is 30% ROI. The formula is one line; deciding what counts as "cost" is where the arguments start.
Read →Gross profit is revenue minus cost of goods sold. Net profit keeps subtracting until it hits interest and taxes. Both numbers tell you something different, and ignoring either one tends to end badly.
Read →Markup % = ((Selling Price - Cost) / Cost) x 100. To back into a price: Cost x (1 + Markup%). Worked examples for common markup levels, because the math is fast once you know which direction to run it.
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By Jessica Martinez