What this simple problem illustrates is the difference between a mark-up and a margin (or profit margin). Okay, so you knew the answer. But before you say we're teaching you to suck eggs, check out how many of your staff know the answer.
Mixing up mark-ups and margins is quite common, and it usually results in lost profits. For example, most service departments we visit say they make a 15% profit margin on sublet work. Yet when we look at the management accounts, the margin is invariably 13%. The reason is that they mark up sublet work by 15% on customers' invoices, which results in a profit margin of 13%.
In this example, the annual loss of profit for the average service department is about £500, because sublet only represents a few percent of sales. But what if the wrong mark-up is applied to something that represents a bigger percentage of sales, like oils and lubricants?
Obviously the loss, compared with your expectation, is far larger. In fact the profit lost by marking-up oil by 50% instead of marking-up to achieve a 50% profit margin is a whopping £22,000 per annum for the average service department! Clearly it pays to make sure everyone knows about mark-ups and margins, and a coaching session is the way to teach staff what they need to know. Start by explaining about 'profit', which is simply the difference between the buying and selling prices. So you make £33 profit when you buy for £100 and sell for £133. Then explain that the profit margin is the profit divided by the selling price expressed as a percentage – in this example £33 divided by £133, or 25%.
Next present the staff you are coaching with a 'ready reckoner' for the mark-ups required to achieve the most common profit margins of 15%, 20%, 25%, 33% and 50% - which means mark-ups of 17.6%, 25%, 33% and 100% respectively. Then pick one of these to show how you arrived at it. For instance, take a margin of 25% and tell them that you have just sold something for £100 at a margin of 25%. Then ask what you bought it for. Do this and you should be watching your profits improve.