Example 2 is a correct use of the word "markup." Notice that the transaction involves only buying the handbag and reselling it. Remember that the term "markup" should not be used when a business adds something to the product. That process is called "value added." For instance, when a custom van company buys the shell of a new van for $5000, adds a luxury interior, and resells the van for $25,000, the increase in price is not called "markup."
In Example 2, there are two important points for people who run small business ventures such as this one.
- Be sure to keep a record of all of your expenses. In this example, notice how incorrect it would be to tell someone that you bought the handbag for $195 and sold it for a profit of $200. It sounds really nice, but it simply doesn't take into account all of your expenses.
- Anytime you earn money, whether it is babysitting, tips, mowing lawns, or having a yard sale, you are responsible for claiming the income on your state and federal income tax returns. Failure to do this is a punishable crime. No one knows the extent of the lost tax revenue from unreported income, but the U.S. Treasury Department has estimated that the problem costs the government about $250 billion per year.
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This is a common error in business. The problem is that the business is using the wrong denominator.
So, the bookstore is actually using a markup of about 42.9%, not 30%. Although this could be an innocent error, because the error results in claiming a smaller markup percent, one is tempted to suspect that the error is sometimes intentional.
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