It depends on what you are considering as "20% markup".
If you consider it "by dividing by 0.8" it would actually be per every 5 units, the markup on the first 4 cover the cost of the 5th.
Essentially it would be rationalized as X% of each unit in the total pool, including the "free" one, covers the value/cost/whatever of one of those units.
Using the same equation as before ...
If you are charging $125 per unit, after 4 units sold that is an extra $100 over the $100 cost per unit, which then would pay for the 5th unit.
Basically, dividing by a percent will determine the "per units" pool that you are looking at, where the last one will always be covered by the previous sold at markup.
If you sold each unit for $200 then for each unit sold, the second would have its cost covered since the pool you are looking at is 2 which is determined by subtracting the number you divided by from 1 and then dividing 1 by the remainder.
Another example would be
$100/0.75 = $133.33... *(would be rounded up to $133.34 in most real world budgeting)
1-0.75=0.25 and 1/0.25=4
Therefore your pool of units is 4 wherein the first 3 sold at $133.34 would pay for the 4th unit.
However if you are considering "20% markup" in the sense of weighting the value of each unit as a fraction or percent of its true value, for example 80% of a unit or Unit times 0.8, then that is correct. After 5 units the 6th would be covered or "free" if you will.
Basically it depends on whether you are factoring in the markup % for all of the units, or for only the units that then pay for the "free" one.
As you said the first method results in greater net profits or gains.
