How do you compute a selling price if you know the cost and the required gross margin?

To compute the selling price, let’s assume that a product has a cost of $100 and the seller wants to have a 30% gross margin on its selling price, or 30% of SP. The relationship between a selling price, cost, and gross margin or gross profit is: SP - cost = gross profit or gross margin. If the gross margin is 30% of SP, the cost of $100 will be 70% of SP.

Algebra allows us to compute the selling price as follows:

SP - cost = gross margin

SP - $100 = 30% of SP

1SP - $100 = 0.3SP

1SP - 0.3SP = $100

0.7 SP = $100

0.7SP/0.7 = $100/0.7

SP = $142.85.

To verify that a selling price of $142.85 will give us the correct gross margin, we subtract the cost of $100 from the $142.85 selling price. The result is a gross profit of $42.85 which when divided by the selling price gives us the required gross margin of 30% ($42.85/$142.85 ).

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

View the original article here