Your burger costs $3.20 to make and sells for $8.00. Is that a rip-off? Not even close: it is a 150% markup, and most of that gap has bills to pay. This week you learn to read it.
Learning objectives. After this week you can (1) find the unit cost of an item you sell; (2) compute a price from cost and markup; and (3) work backwards from a price to the markup or the cost.
Remember this: markup starts from cost. Price = Cost × (1 + Markup).
1) Unit cost: the foundation
Ingredient Cost = Units Sold × Unit Cost
The unit cost is what one item costs to make: the patty, bun and toppings, about $3.20 a burger. You never have to guess it: your decision form prints each item's unit cost. Sell 240 burgers and the ingredients cost 240 × $3.20 = $768. It is a variable cost, paid once per item sold.
2) Markup: a percent of cost
Price = Cost × (1 + Markup)
A 150% markup on a $3.20 burger: $3.20 × 2.5 = $8.00. Think of (1 + Markup) as a multiplier: 50% is ×1.5, 150% is ×2.5, 250% is ×3.5. A 100% markup, called keystone, simply doubles the cost. Keep the same markup when your cost goes up, and your price goes up with it.
Try it
Your burger costs $4.50 to make and you want a 120% markup on top.
Price = Cost × (1 + Markup)
Fill in the boxes.
3) Working backwards: recovering the markup
Markup % = (Price − Cost) ÷ Cost × 100
Cost = Price ÷ (1 + Markup)
An $8.50 burger that costs $3.20: (8.50 − 3.20) ÷ 3.20 ≈ 166%. And a $5.00 item at a 150% markup must cost 5.00 ÷ 2.5 = $2.00. Cost, markup, price: know any two and you can find the third.
Try it
Now backwards. A rival sells a $2.10 taco for $6.50.
Markup % = (Price − Cost) ÷ Cost × 100
Fill in the boxes.
4) Percent vs. dollars
Gross Profit per Unit = Price − Unit Cost
| Item | Unit cost | Markup | Price | Gross profit/unit |
|---|---|---|---|---|
| Burger | $3.20 | 150% | $8.00 | $4.80 |
| Fries | $1.60 | 100% | $3.20 | $1.60 |
| Drink | $1.10 | 200% | $3.30 | $2.20 |
The drink has the biggest markup and the burger earns the most dollars. A percent is a ratio, not a paycheck.
Quick self-check
(a) An item costs $2.40 and you want a 125% markup. Price? (b) An item sells for $9.60 and costs $3.20. Markup? (c) You want a $6.00 price at a 100% markup. What must the unit cost be? (Answers: 2.40 × 2.25 = $5.40; 6.40 ÷ 3.20 = 200%; 6.00 ÷ 2 = $3.00.)
Common mistakes
- Measuring markup against price. Markup divides by cost. Divide by price and you get margin, a different number.
- Adding the percent. A 150% markup on $3.20 is $3.20 × 2.5, not $3.20 + $1.50.
- Chasing the biggest percent. Rank items by dollars per sale, not by markup.
This week in the arena
Take your hero item. Read its unit cost off the decision form, then work out the markup at the price you are charging now. Was that markup a choice, or a guess from day one? Markup is your plan, but the crowd at your corner has the last word, and a price one crowd shrugs at can send another crowd walking. After the close, see what your Daily Report says happened to units.