Keep the denominator visible
For a product costing LKR 1,200 and selling for LKR 1,600, gross profit is LKR 400. The margin is 400 ÷ 1,600, or 25%. Markup is 400 ÷ 1,200, or about 33.33%. They describe the same transaction from different bases.
This example treats LKR 1,200 as the complete direct product cost. It excludes taxes, returns, selling fees and overheads. In a real pricing exercise, first decide what belongs in the cost model so the calculation is not applied to an incomplete amount.
A target margin needs a different formula
Selling price for a target margin equals cost ÷ (1 − margin expressed as a decimal). At a 25% target, divide cost by 0.75. Adding 25% to cost instead calculates a 25% markup.
A target margin at or above 100% is invalid for this formula with a positive cost. The selling-price calculator validates that boundary. Discounts also change the realised margin and should be tested before quoting.
Gross profit still has work to do
Rent, administrative pay and other overheads may still need to be covered by gross profit. A positive gross margin does not automatically produce positive net profit.
Review product mix and actual discounts rather than averaging percentage margins without their sales values. Link the model to recorded cost and revenue so the planned price can be compared with actual trading results.
Worked example
LKR 1,200 cost: two 25% targets
One fictional product; no tax, selling fees or overheads. The target percentage is an assumption, not a recommended price.
- Price using 25% markup1,200 × 1.25 = 1,500.
- LKR 1,500.00
- Profit at that pricePrice less cost.
- LKR 300.00
- Actual margin under markup pricing300 ÷ 1,500 × 100.
- 20%
- Profit at LKR 1,600 selling price1,200 ÷ 0.75 = 1,600 selling price.
- LKR 400.00
- Target margin achieved400 ÷ 1,600 × 100.
- 25%
A 25% markup produces a 20% margin here. The correct denominator is the difference between the two decisions.
Frequently asked questions
Is a higher margin always the right price?
No. The example explains arithmetic. Demand, competition, capacity and the full cost structure require separate commercial judgement.
Can I compare gross margin with net margin?
They measure different profit levels. Net profit includes additional costs, so label the numerator and reporting period clearly.
Sources and limits
This is a simplified pricing illustration. The assumed target is not a recommendation and the example excludes taxes and overheads.
- IFRS Foundation — IAS 2 overview
Background on inventory cost and expense recognition; local applicability and valuation choices require accounting review.
Accessed: 2026-10-08