"But We're Only Making 8 per cent!"

I'm sure that by now, you've heard the oil company's excuse "We're only making 8 per cent profit on petrol/oil!"

And ... they're right.  They've used this excuse before.  They've also said that they should be allowed to earn as much as a profit as other consumer goods.  Well...

To understand this, we need to take a step back.  So, let's imagine.

"Widgets Are Us" is the world's largest maker of widgets.  That's ALL they make.  They tried to make waggles, but they didn't sell.  So, they only make widgets.  After their costs (payroll, rent on building, health insurance for workers, utilities, etc) are taken into account, it costs them $.27 on the dollar to make each widget.  BUT...they're also in business to make a profit, so they can't SELL the widget at "Cost (what it costs to make.)"  They need to make a profit.  So, they sell their widgets at $.30 to each of their buyers.  In other words, they make $.03 PROFIT per widget.

Your friendly neighbourhood store (and I've worked retail, so I KNOW this happens) buys their widgets directly from Widgets Are Us.  They buy them at $.30 per widget, and they buy a LOT of widgets.  BUT, this store (let's call them XYZZ Corp) is also in business to make a profit, so they can't SELL the widget to you at $.30.  And, in fact, when you went shopping the other day you did indeed see one of their widgets for ... $.45?!?!?  Yup.

This difference between what they sell it to you for ($.45) and what they BOUGHT it for ($.30) is called MARKUP.  (This is NOT profit...not yet.)

So -  .45 - .30 = .15 markup.  In this case, it's also 50 per cent.  A 50 per cent markup?!?  Yup.  Again, I've worked retail.

But ... we haven't figured in XYZZ's costs yet.  And they do have a lot of cost.  Their employee's salary, healthcare costs, rent for buildings, utilities, costs for shipping, etc.  When you subtract the COST from the MARKUP, you're left with PROFIT.

Well, XYZZ didn't make this sucker ... er widget, they BOUGHT it, so there's no production cost.  BUT...shipping from their DC (Distribution Centre) to your local store does figure in.  So... we know that it cost you $.45 to buy this widget and they bought it for $.30.

Now it's time for math.  The way you figure profit is the profit relative to the sales price, or (.30/.45) x 100% = ?

In this case it's 66.67 per cent?!?  Yup.  66 per cent profit.  Again, I've worked retail.

The oil companies are correct in that their 8 per cent is peanuts compared to some other items.  BUT ... considering the sheer VOLUME (amount) of petrol purchased at the pump, it becomes easy to see where their record profits are coming from.

An excellent primer to MARKUP (business) can be found here:  http://en.wikipedia.org/wiki/Markup_%28business%29