Part of business handout no 5

• Calculating the number of units needed to earn a target profit

  1. Fixed cost + target profit

  2. Contribution
• Businesses want to earn profit, not just break even
• Contribution


  Sales revenue - Variable costs
• Wholesalers and Retailers


  In addition to manufacturer's profit, they also need to cover their costs to earn a reasonable profit
• Money that must be covered by wholesalers and retailers

  • Direct cost (cost price of goods purchased including transport)
  • Indirect cost (cost of running the business such as wages, rent, electricity)
• Cost into store (CIS) plus mark-up method

  Wholesaler and retailer must first calculate the total cost into store and then add the mark-up to find the selling price
• Mark-up


  The amount of money added onto the CIS to find the selling price, expressed as a percentage
• Other ways to fix the price

  • Market price or going-rate pricing
  • Suggested prices
  • Loss leaders
• Competition


  • If high, prices will be lower. If monopoly, prices can be higher
• Demand and Supply


  Market forces that determine prices. The Law of Demand and Supply states that as price increases, quantity demanded decreases and quantity supplied increases
• Government pricing regulations


  Government controls prices by limiting allowed mark-ups on certain products. Independent Consumer and Competition Commission (ICCC) and Commodity or Marketing Boards play a role
• Discounts


  Reduction in the marked price of a good, to promote sales and encourage quick payments
• Types of discounts


  • Trade discounts
  • Sales discounts
  • Cash discounts