ACCA Performance Management (F5) Certification Practice Exam

What is the definition of markup?

1. Profit expressed as a percentage of sales price

2. Profit expressed as a percentage of cost

3. Profit expressed as total revenue

4. Cost expressed as a percentage of total sales

The correct answer is: Profit expressed as a percentage of cost

Markup is defined as profit expressed as a percentage of cost. This concept is frequently applied in pricing strategies where a business determines how much to increase its costs to set a selling price that will achieve desired profit levels. Specifically, the markup is calculated by taking the profit margin and relating it to the cost incurred to produce or procure a product. For instance, if a product costs $100 to create and the business wants to apply a markup of 20%, the selling price would be $120. This reflects a clear method for businesses to ensure that their pricing covers costs and contributes to the desired profitability. Understanding markup is crucial for effective cost management and pricing decisions, as it helps businesses maintain competitiveness while ensuring profitability. In contrast, other definitions focus on different aspects of financial performance, such as sales price or total revenue, which do not capture the specific relationship between profit and the costs associated with producing goods or providing services.