Before going for the complete formula lets understand it step by step. I will explain you the way I understood it, hoping it will provide better clarity on the calculation :
Lets assume :
V - Vat rate
C - Unit Cost
R - Selling Unit Retail
NR - Net Retail i.e. selling retail before adding vat rate
M - Net Sales Margin
Every merchandiser will set a fixed Margin percentage for each category which he would like to attain through sales. For example a buyer has procured a merchandise , lets say Disney soft toy for 1500 Rs. at landed cost. Now the merchandiser while doing the budgeting was to attain a margin of 35% , so he will use the below formula to calculate the Net Retail ;
C = NR - (NR x M/100)
C = NR{1-(M/100)}
C / {1-(M/100)} = NR
NR = C / {1-(M/100)} --- this is the formula to calculate Net Retail ---
NR = 1500 / {1-(25/100)}
= 1500 / {1-0.25}
= 1500 / 0.75
= 2000
So from the above , we can understand that to the merchandiser will set the Net Retail at 2000 for him to achieve a margin of 25% we can verify the same using the below formula
M % = { ( NR - C ) / NR } x 100 --- this is the formula to calculate Net sales Margin ---
M = { (2000 - 1500 ) / 2000 } * 100
= { 500 / 2000 } * 100
= 0.25 * 100
= 25 %
Now that we have the Unit Cost, Net Margin, Net Retail and Vat Rate we can easily calculate the
selling unit retail
R = NR + (NR * V/100)
= NR x ( 1+V/100)
= 2000 x (1+0.16)
= 2000 x 1.16
= 2320
R = NR x ( 1+V/100) --- this is the formula to calculate Selling Unit Retail ---
The consolidated formula to arrive at the selling unit retail from cost will be below
R = {C x ( 1+V/100)} / (1-M/100)
R = {1500 x (1+16/100)} / (1-25/100)
= {1500 x (1 + 0.16)} / (1 - 0.25)
= ( 1500 x 1.16) / 0.75
= 2320 Rs.
