Markup vs Margin on the Same Item: Why the Rates Differ
Classic corporate finance trap on margin and markup rates
The riddle
A retailer buys an item for €80 and resells it for €100. What is the retailer's margin rate, calculated on the selling price, and its markup rate, calculated on the purchase price?
Need a hint?
Ask yourself each time which price is the base for the percentage calculation, then calculate the gain before dividing it.
Show the answer and the solution
Answer: Margin rate of 20% (€20 on €100) and markup rate of 25% (€20 on €80): they are not equal.
The reasoning
The gross margin on the item is the difference between the selling price and the purchase price: €100 minus €80 = €20. The margin rate is calculated on the selling price: 20 / 100 = 0.20, or 20%. The markup rate is calculated on the purchase price: 20 / 80 = 0.25, or 25%. Both percentages measure the same €20 gain, but their bases differ, which explains the gap. So always state the base of a calculation before comparing two percentages.
What next?
Reasoning improves like memory: by practising often. Next, test yourself on our general knowledge quizzes.