Incomplete Records

Mark-Up and Gross Profit Margin

Mark-Up vs Margin

Both express gross profit as a percentage — the difference is the base (denominator).

Mark-Up Calculations

If mark-up is 20% and sales are £15 000:

• Cost of sales = £15 000 / 120 × 100 = £12 500
• Gross profit = £15 000 / 120 × 20 = £2 500

Margin Calculations

If margin is 20% and sales are £15 000:

• Cost of sales = £15 000 / 100 × 80 = £12 000
• Gross profit = £15 000 / 100 × 20 = £3 000

Key distinction: Mark-up 20% gives a smaller gross profit than margin 20% because the base is smaller (cost rather than sales).

Using Inventory Turnover to Find Closing Inventory

Sometimes mark-up alone is not enough — you also need to use the inventory turnover ratio to find closing inventory.

Inventory turnover formula:

Cost of sales / ((Opening inventory + Closing inventory) / 2) = Inventory turnover (times per year)

Rearranged to find closing inventory:

Closing inventory = (Cost of sales / Inventory turnover × 2) − Opening inventory

Worked example: Sales £180 000; mark-up 20%; opening inventory £15 000; inventory turnover 8 times

• W1 Cost of sales = 180 000 × 100 / 120 = 150 000
• W2 Gross profit = 180 000 − 150 000 = 30 000
• W3 Closing inventory = (150 000 / 8 × 2) − 15 000 = 37 500 − 15 000 = 22 500
• W4 Purchases = 150 000 + 22 500 − 15 000 = 157 500

Note: Some questions give inventory turnover to find closing inventory; others use it to verify inventory (detect theft — see Section 9).