Clarifying Numbers to Reach a Better Gross Margin

[Editor’s note: In the column “Divide and Conquer,” April 30, there was a misleading calculation. Below are letters that discuss how to correctly perform the math.]

It's a Common Mistake in Math

The teacher in me must comment on the excellent comments about markup versus profit. While your article was outstanding, the example in the box was a little misleading. One thousand dollars divided by 0.64 is the total $1,562.50 rather than just $562.

These kinds of issues are the most missed questions on the Oklahoma State Contractors test.

The other big one is how to figure a 20-10-10 discount because each must be subtracted before taking the next discount. Thanks for your good work, Mike.

Mark I. Clemons, M.S. Ed., NBCT
Master Teacher/Author/Speaker
Online Faculty with HVACREducation.net
Bixby, OK

What's the Inverse of That Number?

I very much enjoyed Mike Murphy’s editorial on Murphy’ Law, “Divide and Conquer.” Your insight on gross margin was very powerful.

I did want to take a moment to point out that 0.64 is not the inverse 0.36.

The 0.64 factor is a result of taking 1 minus the gross margin target, which in this case would be 1-0.36.

The inverse of a number is achieved by simply taking a number and placing it in the denominator with one as the numerator.

For example, the inverse of 0.36 is 1/0.36 or 2.78.

Michael J. Falso
Product Manager
Stebco, Inc.
Parsippany, N.J.

Distinction Between Markup and Margin

Mike Murphy’s analysis regarding margin percentage is correct. Dick Harshaw should have pointed out that there is a dramatic difference between “markup” and the concept of “margin.”

Markup says, “What number do I need to multiply times my cost to reach the profit objectives.” It’s useful to use markup because people easily can do the math and also understand the concept. For example, if you want 35 percent gross margin, tell your people to use 1.53 multiplier.

Margin is different. It says, “What percent of the sell price do I want to be profit?” So, if you take the sell price of $153 in my example, and you subtract cost of $100, you get $53, which is 35 percent of the sell price, and therefore 35 percent gross margin. You need to know this number because salesmen’s commissions and other items are usually calculated as a percent of sell price.

William Faris
Oklahoma City, OK

Send correspondence via e-mail to letters@achrnews.com.

Publication date:05/21/2007