GPI 042 – Make sure your people know how to markup pricing. Do not assume their method yields your desired GP%s.

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This is a simple review for ensuring correct pricing methods, but one that might be very lucrative if taught thoroughly.  Your personnel in charge of pricing may already know how to correctly calculate markups to derive a desired gross profit % but do not assume this.  Take the time for a review.  Here are a few examples to review.

Example 1:  If you have $80.00 of cost and want to get a price to generate 20% gross profit on this cost, do not multiply your cost times 20% and add it to the cost.  This is wrong.  Doing this will yield a 16.667 gross profit margin %, not 20%.

Correct Method:  Take the cost of $80.00, divide the cost by (1 minus GP%) or (1.0 – .20) or .80.  Thus $80.00/ .80 = Selling Price of $100.00.

Example 2:  If you have a cost of $65.34 and need to develop a selling price to generate a 38% gross profit, calculate $65.34/ (1.0-.38) = $65.34/.62 = $105.39.

Example 3:  If you have calculated a total cost of $834.65 and need to figure a selling price that will generate a 10% gross profit, divide $834.65/ (1.0-.10) = $834.65/.90 = $927.39.

The mistake many people make is to multiply the desired gross profit by the cost which derives a selling price which does not yield that gross profit.  Without testing it and verifying this price indeed yields the desired gross profit %, the company prices are calculated repeatedly incorrectly, cutting into profit.

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