THE MATHEMATICS OF PROFIT CALCULATION

Calculating profit correctly is of obvious importance, yet it is often done erroneously. The most common mistake is made when people believe they have applied profit as a percentage of the selling price, when in fact they have applied it as a percentage of their costs.

Example: If the cost of an item or service to the horticulturist was $100 and it was desired to sell it for the price that would return a profit of 30 percent, what would be the selling price?

• The incorrect solution—Some people might calculate the profit and selling price this way:

A. $100 x.30 = $30 (profit)

B. $100 + $30 = $130 (selling price)

It would surprise them to discover that they had actually added a profit of only 23 percent to their costs. The mistake was the application of the desired profit percentage to the cost, not the final price. Recall that the question sought was what selling price would return a profit of 30 percent.

• The correct solution—If the profit is to represent 30 percent of the selling price, then the cost of what is being sold will represent 70 percent. Seventy percent is the inverse of 30 percent [100 percent – 30 percent = 70 percent]

A. $100 divided by.70 (the inverse of the desired profit) = $142.86 (the selling price)

B. $142.86 – $100 = $42.86 (the desired 30% profit)

The key to the correct calculation of profits is remembering to divide costs by the inverse of the desired profit percentage.

The same calculation can be used to mark up merchandise for sale. Markup is the difference between the wholesale cost of materials and their retail selling price. Horticulturists in flower shops, garden centers, and retail nurseries are obvious users of markup mathematics; but so too are those in the service businesses. Landscapers, turf care operators, arborists, and others all mark up their material costs to cover the costs of acquisition and handling. Markup is expressed as a percentage of the retail selling price.

Example: If a florist needed a 75 percent markup on roses to cover the costs associated with the busy Valentine’s Day season, and the wholesale cost of the roses was $15 per dozen, the retail price of a dozen roses would be $60.

Wholesale price

Retail price = —————————-

(100 percent – markup)

$15.00

Retail price = —————-

(100% – 75%)