Although companies normally compute the gross profit on the basis of selling price,

you should understand the basic relationship between markup on cost and markup on
selling price. For example, assume that a company marks up a given item by 25 percent
on cost. What, then, is the gross profit on selling price? To find the answer, assume that
the item sells for €1. In this case, the following formula applies.
Cost 1 Gross profit 5 Selling price
C 1 .25C 5 SP
(1 1 .25)C 5 SP
1.25C 5 €1.00
C 5 €0.80
The gross profit equals €0.20 (€1.00 2 €0.80).