Gross margin and markup: the same money, different percentages

An item leaves SEK 40 before other expenses

Our fictional shop sells an item for SEK 100. The cost of that particular sold item is SEK 60. The difference is 100 − 60 = SEK 40 of gross profit. All amounts exclude VAT, and we assume no discounts or returns. The exercise needs no actual tax rate.

That gross profit must also contribute to other expenses in the business. Premises, administration and financing have not been subtracted from our SEK 40. The amount is therefore not automatically net profit, cash flow or money available for distribution to owners. We use a simple merchandise example; other industries can organise their costs differently.

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Margin divides by sales; markup divides by cost

Gross margin is 40 / 100 × 100 = 40%. It asks what proportion of sales remains after subtracting the sold item’s cost. Markup is instead 40 / 60 × 100, approximately 66.67%. It asks how far the price exceeds cost in relation to that cost.

Always check what the percentage refers to. Labelling 66.67% as gross margin would claim more of the sale remains than our SEK 40. Both expressions have the same numerator but different bases. Write out the entire fraction the first time you compare a markup with a margin, so the distinction can be checked.

A 25% markup produces a 20% margin

A separate item costs SEK 80. A markup of 25% of cost is 80 × 0.25 = SEK 20, producing a price of SEK 100. Gross margin is 20 / 100 = 20%. The price is cost multiplied by 1.25, while the margin’s base is the larger selling price.

For a 25% margin with the same SEK 80 cost in this simple model, the price would instead be 80 / (1 − 0.25), approximately SEK 106.67. This is just an algebraic check of the definition, rather than a suggestion for a real shop’s pricing. Cost and sales must refer to the same item.

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Use the same principle for a period’s sold goods

Now assume sales of SEK 20,000 and a cost of goods sold for the period of SEK 12,000. Gross profit is SEK 8,000, and gross margin is 8,000 / 20,000 = 40%. Purchases still held in inventory should not automatically replace the cost of the goods actually sold in this calculation.

Read the report’s labels, period and cost allocation before comparing two businesses. Gross margin answers a narrower question than operating margin and net margin. Use the company-search guide to check identity, then continue to the operating-profit lesson. These examples are manual calculations rather than claims about special margin tools in Investiq.