Ratio Analysis: How can Mark-ups be used as an assessment tool?
Mark-up tests are useful to access risk, test the credibility of both the business and declarations made. They may also give an indicator as to whether duty has been paid on the product.
Mark-ups are a fundamental part of business; businesses must place a mark-up on their purchases sufficient to meet a realistic profit margin, after overheads etc. are taken away from the equation. In addition, their mark-up needs to be competitive with the market at large.
When considering mark-up of excise goods, you should consider the excise duty element within the calculation. For example, if a mark-up test was carried out in reverse, to establish volume of excise goods sold, the volume calculated would depend on whether duty was also vectored in or out of the equation.
Businesses with a high turnover of excise stock may add lower mark-ups than those with a low turnover of stock; this is because their volume of sales would support the desired overall profit margin. Clearly the advantage here is that the lower price will under cut competitors. Clearly a very low mark-up would be an indicator of risk, but needs to be considered in the wider context of the business.