materials calculate price profit margin unit price wrong price price formula faq The unit price for materials looks wrong. My calculation gets a different price.

We tend to get asked the question "what is the formula for adding the OH markup and Profit for material catalog items as they are not making sense". 

Most people are confused between a profit margin and a profit markup.  LMN uses profit margins - which give you a true net profit... so if you're looking for 10% net profit, you'll get 10% net profit.

Consider this:  You have something that costs $100 and you want to make 20% net profit.  Most companies do the following:

$100 x 1.20 = $120

And there's your 20%.  Or is it?  It's not.  And if you don't believe us, just do the math.

  1. Profit Margin = (Sales - Costs) divided by (Sales)
  2. Profit Margin = ($120 - $100) divided by ($120)
  3. Profit Margin = ($20) divided by ($120)
  4. Profit Margin = 16.67%

Did you see that?  Just a few seconds ago you added a 20% profit margin, but when you do the math, you realize you only made 16%.  Just imagine what that's been costing your company over the last 10 years!!!!

The solution lies in correcting how profit is added.  If you want to earn a profit of 10%, you cannot simply add 10% to the cost.  It doesn't work that way.  10% of the cost is less than 10% of the selling price, and that is how a profit margin is calculated - by a % of the selling price.

The simple fix is to fix the formula for adding profit.  Profit is correctly added by using the following formula:

Price = (Cost) divided by (1 - Profit Margin)

So, in our example above, it would be:

  1. Price = ($100) divided by (1 - .20)
  2. Price = ($100) divided by (.8)
  3. Price = $125

It looks weird, but its right... just do the math:

  1. Profit Margin = (Sales - Costs) divided by (Sales)
  2. Profit Margin = ($125 - $100) divided by ($125)
  3. Profit Margin = ($25) divided by ($125)
  4. Profit Margin = 20%

Here's the Material item formula complete with all markups and margins:

  • Cost
  • Plus Shipping
  • Plus Warranty
  • Plus Tax
  • = Subtotal + OH Markup
  • = Subtotal divided by (1 - profit as a decimal number)
  • = item price

For example:

  • Cost $26.40 + shipping (0%) + warranty (0%) + tax (0%) = $26.40
  • $26.40 + OH Markup (10%) = $29.04
  • Profit = 13.8% = 0.138
  • $29.04 / (1 - 0.138) = $33.69 is the item price

Comments

0 comments
Please sign in to leave a comment.