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One of the most important financial concepts you will need to learn in running your new business is the computation of gross profit. And the tool that you use to maintain gross profit is markup.
The gross profit on a product is computed as:
Sales - Cost of Goods Sold = Gross Profit
To understand gross profit, it is important to know the distinction between variable and fixed costs.
Variable costs are those things that change based on the amount of product being made and are incurred as a direct result of producing the product.
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Variable costs include:
Materials used
Direct labor
Packaging
Freight
Plant supervisor salaries
Utilities for a plant or a warehouse
Depreciation expense on production equipment
Machinery
Fixed costs generally are more static in nature. They include:
Office expenses such as supplies, utilities, a telephone for the office, etc.
Salaries and wages of office staff, salespeople, officers and owners
Payroll taxes and employee benefits
Advertising, promotional and other sales expenses
Insurance
Auto expenses for salespeople
Professional fees
Rent.
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