CSLB Law & Business ExamBusiness FinancesMedium
A contractor wants a 20% gross profit margin on a job. What markup percentage should be applied to the direct cost to achieve that margin?
- A30%
- B25%
- C15%
- D20%
Show answer & explanationAnswer & explanation
Correct answer: B. 25%
Markup = Margin ÷ (1 − Margin) = 0.20 ÷ 0.80 = 0.25, or 25%. Margin is based on selling price, while markup is based on cost, so a 20% margin always requires a higher markup percentage.
Why the other options are wrong
- A. This markup would produce a margin higher than 20%.
- C. This is lower than required and would produce less than a 20% margin.
- D. Using the margin percentage directly as markup is a common but incorrect shortcut.
Margin-to-Markup Conversion
A formula used to convert a desired gross profit margin (based on price) into the equivalent markup percentage (based on cost).
- Markup = Margin ÷ (1 − Margin)
- Margin = Markup ÷ (1 + Markup)
- Markup % is always greater than margin % for the same dollar profit
Memory trick: Margin looks at price, markup looks at cost — flip the fraction to convert.