ACCA Performance Management (F5) Certification Practice Exam

What is the relationship between markup and margin?

1. Markup is calculated using sales price; margin is based on cost

2. Markup is based on cost; margin is based on sales price

3. Both are identical in calculation

4. Markup is relevant only in wholesale, margin only in retail

The correct answer is: Markup is based on cost; margin is based on sales price

The relationship between markup and margin primarily revolves around how each is calculated and the basis from which those calculations are derived. Specifically, markup refers to the amount added to the cost price of a product to determine its selling price. It is expressed as a percentage of the cost. For instance, if a product costs $100 and a company applies a markup of 20%, the selling price would be $120. Margin, on the other hand, represents the difference between the selling price and the cost price, expressed as a percentage of the selling price. Using the previous example, if the selling price of the product is $120, the margin would be the difference between the selling price and the cost (which is $100), divided by the selling price: ($120 - $100) / $120 = 16.67%. Understanding this distinction is essential as it helps businesses set prices appropriately and assess profitability from different perspectives. Markup focuses on cost, while margin evaluates profitability from the sales price. This differentiation is crucial for pricing strategies and financial analysis within different sectors, supporting decision-making and performance management.