Business summary topic 3 handout 5

• Business summary
• Price


  The amount of money charged for a product or the value consumers exchange for the benefit of having or using the product
• Pricing


  One of the 4Ps of the marketing mix, determining the right price for goods and services
• Costing provides guidance for pricing
• Understanding cost concepts is important before discussing pricing
• Classification of costs


  • Fixed costs
  • Variable costs
• Fixed costs


  Costs that do not change as output changes, e.g. factory rent, supervisor's salary
• Variable costs


  Costs that change as output changes, e.g. raw materials, piece worker wages
• Classification of costs


  • Direct costs
  • Indirect costs
• Direct costs


  Costs directly linked to a particular production line, e.g. raw materials, production worker wages
• Indirect costs


  Costs that cannot be directly related to a particular production line or product, e.g. supervisor's salary, maintenance, office staff salaries
• Indirect costs


  Also known as overhead costs
• Indirect costs are apportioned to various product lines using an agreed basis to determine the unit-cost of the products manufactured
• Pricing approach


  Differs for manufacturers, wholesalers and retailers
• Manufacturers


  Must sell a product at a price above cost to earn a profit, use break-even analysis to predict profit and determine break-even point
• Break-even analysis


  1. Determine break-even point

  2. Use knowledge for decision making
• Break-even point


  The level of production where a business does not earn any profit or incur any loss, where sales revenue equals total costs
• The business incurs losses when it produces below the break-even point, and generates profits when production is beyond the break-even point
• Direct cost relates to a specific production line, while indirect cost is an overhead cost not directly linked to production