Business · Worked example
How to calculate blended margin across two product lines
Add the revenue and included costs from every product line before calculating the combined percentage. In this hypothetical example, 60 standard units produce $1,800 of revenue and $720 of profit, while 10 premium units produce $1,200 of revenue and $600 of profit. Together they produce $3,000 of revenue, $1,680 of cost, and $1,320 of profit. The blended margin is therefore 44.00%, not the 45.00% simple average of the two product-line margins.
Combine dollars before percentages
The standard line sells 60 units at $30 each. Its $18 unit cost produces $1,800 of revenue, $1,080 of cost, and $720 of profit, so its margin is 40%. The premium line sells 10 units at $120 each. Its $60 unit cost produces $1,200 of revenue, $600 of cost, and $600 of profit, so its margin is 50%.
A simple average gives 45%, but it incorrectly gives the two percentages equal influence. The standard line represents 60% of total revenue and the premium line represents 40%. Weighting the margins by revenue gives 40% times 60% plus 50% times 40%, or 44%. Adding the underlying dollars reaches the same result with less room for a weighting mistake: $1,320 profit divided by $3,000 revenue.
Reconcile margin and markup without mixing them
Margin divides profit by revenue. For the combined scenario, $1,320 divided by $3,000 is 44.00%. Markup divides that same profit by cost, so $1,320 divided by $1,680 is 78.57%. They describe the same dollars from different denominators and should not be substituted for each other.
The IRS explains the accounting sequence for a product business as net receipts minus cost of goods sold equals gross profit. This example uses the same basic subtraction for a planning estimate, but it is not a tax return calculation. Returns and allowances, inventory rules, and the costs included in cost of goods sold require the records and accounting treatment that apply to the business.
Use a consistent cost scope
Both product lines must use the same cost basis before they are combined. If one line includes packaging, marketplace fees, discounts, returns, or allocated overhead while the other does not, the blended percentage may be mathematically correct but not decision-useful. Define the period and included costs first, then total the dollars for that same period.
The 44.00% result is a snapshot of this hypothetical sales mix, not a forecast. Selling more premium units would change the mix, but so would discounting them or incurring different fulfillment costs. Compare a second exact scenario rather than assuming the current blended margin will remain fixed as volume changes.
Combined standard and premium product lines
Hypothetical inputs: Revenue or sale price: 3000; Total cost: 1680.
- Profit: $1,320.00
- Profit margin: 44.00%
- Markup: 78.57%
Limitations and what to check
This hypothetical example is an educational planning estimate, not accounting, tax, pricing, or financial advice. It assumes all 70 units sell in one consistent period at the stated prices and costs. It does not automatically include returns, discounts, sales tax treatment, marketplace fees, payment processing, shipping, packaging, labor, spoilage, unsold inventory, or fixed overhead. Include relevant costs consistently and use your own records. Consult a qualified professional for accounting and tax treatment.
Sources
- IRS Publication 334: Tax Guide for Small Business — The IRS explains that a product business figures gross profit by subtracting cost of goods sold from net receipts after returns and allowances. It also identifies inventory and purchase records that affect cost of goods sold. The product mix and all scenario values here are Fair Calcs' own hypothetical illustration.