Markup, Markdown, and Gross Margin: Module 3 - Bus Math

Business Mathematics
Governor Pack Road, Baguio City, Philippines 2600

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
MODULE 3 – BUS MATH Subject Teacher:
MARKUP, MARKDOWN, AND GROSS MARGIN

Learning Objectives:
At the end of this module, student must be able to:
a. Define markup, and mark down;
b. Compute for the markup and the markdown;
c. Differentiate markup from gross margin; and
d. Explain how gross margin is used in sales.
Have you tried buying online? Have you

noticed that some products, even though they are
very similar to each other, they differ in prices?
As a seller you would always want to sell at a

higher amount than your cost. However, increasing
prices have principles that each must follow.
In this module, you will learn how do businesses

get to decide or compute how much they should
add up or deduct from their product’s prices. In this
module, you will also be introduced to terms you
P 225 free shipping encounter time in again in business related
subjects.
Let us begin by differentiating the terms cost and selling price. To give you an illustration, imagine
yourself back in your earlier years when you bought some candies from a store far from school and
brought it in school and sold it to other kids. When you bought the candies, in the eyes of the seller, it
is the selling price, while in your point of view, that’s the cost. When you sell those candies, the price
that you will set now will be your selling price since you are now the seller.
In buying and selling transactions, businesspersons are interested in calculating how much profit
they can gain if they sell a product that they bought at a lower price. For example, if you bought a lot
for ₱800,000 and you want to sell it at ₱200,000 higher than the original price, then you must sell the lot
at ₱1,000,000. In other words, the price must be increased by ₱200,000. The ₱200,000 additional cost is
called the markup, which is also occasionally called markon. The markup can be defined as the
amount that is added to the original cost of an item to arrive at a selling price.
To give you another idea, let’s make use of the candies. Let’s say you bought those candies at
₱2 per piece and you purchased a total of 10 candies. In other words, you spent ₱20 for 10 pieces of
a candy. Now, let’s say that your classmates were very interested in your candy because they could
not buy it in your school or anywhere near school since you bought it from a far location. They wanted
your candies and you having a business mind tried to sell your candies to your classmates. To be fair,
you priced it at ₱3 each and your classmate bought all your candies. In total you have received ₱30
in exchange of your candies.
In the problem, the cost of the candy is the ₱2 each at which you bought the candies and the
selling price is the ₱3 per piece at which you sold the candies. That ₱1 per piece difference is what we
call now a profit. You will learn more about profit in this module and in succeeding modules as well as
other ABM specialized subjects. How to compute them and how are they presented in a business?
That ₱1 increase in the price is also seen as the markup. It is the amount added to the original
cost of the candy to arrive at a selling price, which is ₱3 per piece. Had it gone lower or down, we
would’ve called it markdown.
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The markup rate may be thought of as the ratio of the markup to the original price. The following
is the formula for computing the markup rate:
𝑀𝑢
𝑟= 𝑥 100%
𝑀𝑜
Where 𝑟 is the markup rate, 𝑀𝑢 is the markup, and 𝑀𝑜 is the original price or original cost. In the situation
given previously, you can compute for the markup rate as follows:
Situation 1: Situation 2:
𝑀𝑢 𝑀𝑢
𝑟= 𝑥 100% 𝑟= 𝑥 100%
𝑀𝑜 𝑀𝑜
200,000 1
𝑟= 𝑥 100% 𝑟 = 𝑥 100%
800,000 2
𝒓 = 𝟐𝟓 % 𝒓 = 𝟓𝟎 %
From the definition of markup, you can also form the following important formula for the selling
price (S) of an item:
S = Mo + Mu
In the previously given context, you know already that the ₱1,000,000 selling price was obtained
as follows:
Situation 1: Situation 2:
S = Mo + Mu S = Mo + Mu
S = 800,000 + 200,000 S=2+1
S = P1,000,000 S = P3
Note that each of these formula can be transformed to solve for any of the given variables
when two other variables are given. For example, you can also solve for the markup when the original
costs and the selling prices are known. Below is a summary of these formula.
FORMULA IN GETTING THE MARKUP AND THE MARKUP RATE
If an item is bought at an original price Mo and sold at a higher price S, then the
markup Mu and the markup rate 𝒓 can be calculated using the following
formula:
Mu = S - Mo
𝑀𝑢
𝑟= 𝑥 100%
𝑀𝑜
In a more advanced discussion or computation, formula can be manipulated without changing

the equity of the values. You have to remember that it’s not always the markup or markup rate that
will be asked. Later problems may also ask the original selling price or the cost or it may also ask for the
new price considering the information that will be provided. Hence, it is important to take note that in
computing worded problems, identifying the given first is important. It will help you to identify what’s
missing and what are the available information that you may use to solve for the missing value.
Memorizing your formula is good but it’s best to understand the formula on why it is presented
that way. For example, knowing your markup rate means that the final answer should be in percentage
because markup rate is pertaining to the value in percent of the increase in the original value in
comparison to the original value. In our case, it is the value of the markup in percent in comparison to
the original cost or price. In order for us to get that, we put the value we want to know its percentage
value as the numerator and the original value as the denominator. The result will be in decimal, so we
multiply it to 100% to transform it to a percent.
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Here are several examples on determining the markup and the markup rate.
EXAMPLE 1. In 2012, Mark bought a residential lot for ₱350,000. He sells the property at its present market
value, which is ₱600,000. How much is the markup? What is the markup rate?
SOLUTIONS AND ANSWERS
It is given that S = ₱600,000 and Mo = ₱350,000. The markup Mu and the markup rate 𝑟 are
computed as follows:
Mu = S - Mo
Mu = 600,000 – 350,000
Mu = ₱250,000
𝑀𝑢
𝑟= 𝑥 100%
𝑀𝑜
250,000
𝑟= 𝑥 100%
350,000
𝒓 = 𝟕𝟏. 𝟒𝟑%
Thus, the markup is ₱250,000 and the markup rate is about 71.43%.
We now use the two formula that have been presented to derive other formula. First, the formula
𝑀𝑢
for markup rate, 𝑟 = 𝑥 100% , can be transformed as follows:
𝑀𝑜
M u = 𝑟 x Mo
If we substitute this value of Mu in the formula for the selling price, S = Mo + Mu , we will have:
S = Mo + (𝑟 x Mo)
Thus, we now have a formula for the selling price of an item when its original price and the
markup rate are given. This formula may be simplified by factoring Mo ; that is,
S = Mo (1 + 𝑟)
Now if we need to solve for Mo , just divide both sides of the equation by 1 + 𝑟; that is,
𝑆
𝑀𝑜 =
1+𝑟
This formula is used when we need to calculate the original price of an item when its selling price
and markup rate are given.
Here’s another good example.

A certain shop buys and sells foreign currencies. Suppose it buys a US dollar at ₱44, and then
sells the dollar at a 2.3% markup rate. What is the selling price of a US dollar? Round off your answer to
the nearest centavo.
The given information are Mo = ₱44 and 𝑟 = 2.3% -> 0.023. we can solve for the selling price using
the previous formula for S.
S = Mo (1 + 𝑟)
S = 44 (1 + 0.023)
S = ₱45.01
Therefore, the selling price of a US Dollar is about ₱45.01.
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There are cases when companies sell an item at a lower price than its original price, like when
they need to dispose of old socks of the item quickly. One reason for having such decrease in price is
that the values of certain products – for example, mobile phones and laptops – depreciate over time.
So in order to set the selling price, the companies deduct a certain amount from the original price of
the item. Such deducted amount is called the markdown. The ratio of the markdown to the original
price is called the markdown rate.
FORMULA IN GETTING THE MARKDOWN AND THE MARKDOWN RATE
If an item is bought at an original price Mo and sold at a lower selling price S, then the
markdown Md and the markdown rate 𝑟 can be computed using the following formula:
Md = Mo - S
𝑀𝑑
𝑟= 𝑥 100%
𝑀𝑜
Here is an example.
The price of an item, which was originally sold at ₱425, was reduced to ₱357. What is the
markdown rate?
The given information are Mo = ₱425 and S = ₱357. We need to solve for the markdown rate
𝑟; but we need to compute first for the markdown Md . Hence,
Md = Mo - S
Md = 425 – 357
Md = P68
We can now solve for the markdown rate as follows:
𝑀𝑑
𝑟= 𝑥 100%
𝑀𝑜
68
𝑟= 𝑥 100%
425
𝒓 = 𝟏𝟔%
Therefore, the markdown rate is 16%.
Similar to formula involving markup, other formula may also be derived from the two given
𝑀𝑑
formula involving markdown. The formula for markdown rate, 𝑟 = , can be transformed as follows:
𝑀𝑜
M d = 𝑟 x Mo
If we substitute this value of Md into the formula for markdown, Md = Mo - S, and then we solve
for S, the following will be the result:
M o - S = 𝑟 x Mo
S = Mo - (𝑟 x Mo)
Thus, we now have a formula for the selling price of an item when its original price and
markdown rate are given. This formula may be simplified by factoring Mo ; that is,
S = Mo (1- 𝑟)
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If we divide both sides of the equation by 1- 𝑟, we can obtain the following:

𝑆
Mo =
1−𝑟
This formula is used when we need to calculate the original price of an item when its selling price
and markdown rate are given.
Here is another example.

Luffy purchased a laptop for ₱22,000. After a few months, he purchased a new laptop and
decided to sell his older laptop at a price that is 40% lower than its original price. How much should he
sell his older laptop?
Since it was given that Mo = ₱22,000 and 𝑟 = 40% (or 0.04), we can use the formula that we
have previously derived to solve for the selling price S of the laptop. So we have the
following:
S = Mo (1- 𝑟)
S = 22,000 (1- 0.04)
S = ₱13,200
Therefore, Luffy should sell his older laptop at a price of ₱13,200.
GROSS MARGIN
The concept of gross margin is another way of looking at how the selling price of an item is
affected by a certain add-on percentage. Just like markup, the gross margin Mg may also be
computed by subtracting the original price from the selling price of an item; that is,
Mg = S – Mo
It is important to note, however, that gross margin and markup are NOT the same concepts.
One of the major differences is in the way their respective rates are computed.
Recall that the markup rate is the ratio of the increase in price (or the markup) to the original
price. On the other hand, the gross margin rate is the ratio of the gross margin to the selling price
(instead of the original price). The formula involving gross margin are summarized below.
FORMULA IN GETTING THE GROSS MARGIN AND THE GROSS MARGIN RATE
If an item is bought at an original price Mo and sold at a lower selling price S, then the gross
margin Mg and the gross margin rate 𝑟 can be computed using the following formula:
Mg = S - Mo
𝑀𝑔
𝑟= 𝑥 100%
𝑆
Let us examine further the difference between markup rate and gross margin rate. Suppose an
item, which has an original price of ₱1,000, is sold at ₱1,250. Study how the markup rate and gross
margin rate are computed below.
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Markup Rate Gross Margin Rate

Given: Mo = ₱1,000; S = ₱1,250 Given: Mo = ₱1,000; S = ₱1,250
The markup is computed as follows: The gross margin is computed as follows:

Mu = S - Mo Mg = S - Mo
Mu = 1,250 – 1,000 Mg = ₱,250 – ₱,000
Mu = ₱250 Mg = ₱250
Solving for the markup rate, we have: Solving for the gross margin rate, we have:
𝑀𝑢 𝑀𝑔
𝑟= 𝑥 100% 𝑟= 𝑥 100%
𝑀𝑜 𝑆
250 250
𝑟= 𝑥 100% 𝑟= 𝑥 100%
1,000 1,250
𝒓 = 𝟐𝟓% 𝒓 = 𝟐𝟎%
Notice that the values of the markup and the gross margin are equal or the same. However, the
markup rate (which is computed based on the original price of ₱1,000) and the gross margin rate
(which is computed based on the selling price of ₱1,250) are NOT equal.
Here is an example.
Song Jong Ki spent ₱2.4 million to construct a house. He then sold the house at ₱3 million. How
much was the gross margin? What was the gross margin rate?
The given information are Mo = ₱2,400,000 and S = ₱3,000,000. The gross margin can be
computed as follows:
Mg = S - Mo
Mg = 3,000,000 – 2,400,000
Mg = ₱600,000
The following is the calculation of the gross margin rate:
𝑀𝑔
𝑟= 𝑥 100%
𝑆
600,000
𝑟= 𝑥 100%
3,000,000
𝒓 = 𝟐𝟎%
Now let us derive a formula for the selling price when the original price and the gross margin
rate are given. We can use the two previously presented formula involving gross margin to form the
following new equations:
𝑀𝑔
𝑟= 𝑥 100%  Mg = r x S (1)
𝑆
Mg = S – Mo  S = Mg + Mo (2)
If we substitute the value of M g from equation (1) into equation (2) above, we can obtain the
following:
S = (r x S) + Mo
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Solving for S, we have:

S - (r x S) = Mo
S(1 – r ) = Mo
Mo
S=
1−𝑟
Consider again the previous problem. It was mentioned that Song Jong Ki spent ₱2.4 million to
construct the house. If he wants to have a gross margin rate of 25%, how much should he sell the
house?
It was given that Mo = ₱2,400,000 and r = 25% or 0.25. the selling price can be computed
using the previous formula that we derived.
Mo
S=
1−𝑟
2,400,000
S=
1−0.25
S = ₱3,200,000
Thus, Song Jong Ki should sell the house at ₱3,200,000.
In the next example, observe that when markup rate and the gross margin rate are equal, the
corresponding selling prices are not equal.
Here is the example.

Fi Lingka was requested by his manager to calculate the selling price of an item that costs
₱600,000 to produce if their company will apply:
1. a 20% markup rate; or
2. a 20% gross margin rate.
It was given that Mo = ₱600,000.
1. The markup rate is r = 20% or 0.20. To solve for the selling price S when the original price
Mo and the markup rate are given, we can use the formula below.
S = Mo (1 + r)
S = 600,000 (1 + 0.20)
S = ₱720,000
Therefore, at 20% markup rate, the selling price of the item will be ₱720,000
2. …
The markup rate
(continued is r =page)
to next 20% or 0.20. When the original price and the gross margin rate are
given, the selling price can be computed as follows:
Mo
S=
1−𝑟
600,000
S=
1−0.20
S = ₱750,000
Thus, at 20% gross margin rate, the selling price of the item will be ₱750,000.
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One of the main reason why this happens is because the markup rate is based on the original
cost while the gross margin rate is based on the selling price.
References:
 BAL 650.0151 Si79 2016 Sirug, Winston S. (2016), Business mathematics for senior high
school - ABM specialized subject: a comprehensive approach, Mindshaper Co., Inc.,
Intramuros, Manila
 Jerico, B. B., & Jeffrey, S. M. (2017). Business Mathematics for Senior High School. Quezon City:
C & E Publishing.
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Business Mathematics

Governor Pack Road, Baguio City, Philippines 2600

MODULE 3 – BUS MATH Subject Teacher: