price setting

• Pricing and profit


  Correct pricing is essential to provide a profit and allow the business to expand
• Desired Net Profit


  Minimum desired profit is the lowest acceptable profit figure usually similar to previous income plus a return on the amount invested
• Pricing methods


  • Selling prices can be set using:
  • Recommended retail price (RRP)
  • Competitors prices
• Recommended retail price (RRP)


  The selling price that is recommended by the manufacturer of wholesalers
• Competitors prices


  The prices charged by businesses competing in the same market
• Competitors prices are much lower


  An adjustment may have to be made to selling prices
• Market reaction


  The responses of customers in a particular marketplace to price levels for a particular good or service
• Business owners should always be alert to changes in the general market conditions as they can change quickly
• Quotes


  A method of determining a selling price by estimating the costs involved with particular jobs and then adding on certain amount to provide for profit
• Factors to consider when giving quotes


  • Cost of labour
  • Cost of materials
  • Desired profit
• Percentage mark up


  Determining selling prices by adding to the cost price a predetermined profit margin
• Cost-volume profit analysis (break-even analysis)


  An analysis tool that allows a business to determine a selling price or volume of sales that will let them achieve a specific profit goal
• Break even point


  The level of sales where total revenue equals total expenses and the business make neither a profit nor a loss
• Variable costs


  Costs that vary directly with the level of activity/sales
• Fixed costs


  Costs that do not vary with the level of activity
• Contribution margins


  The difference between the selling price of an item and its variable cost
• Breaking analysis formula


  1. A tool used by business owners to evaluate business proposals

  2. Calculates how many products need to be sold in order for the business to earn a certain profit and at break even point that profit is zero
• mark up selling price


  cost price (1 + markup/100)
• mark up cost price 


  selling price/ (1 + markup/100)
• total variable costs 


  total variable cost = variable cost x quantity
• total costs 


  fixed cost + total variable cost
• Contribution margin (variable costs per unit)

  selling price - variable cost
• breakeven point (selling price)


  total cost/quantity
• breakeven point (units)


  fixed costed/contribution margin
• breakeven point (units) + desired profit 


  (fixed cost + profit) / contribution margin
• breakeven point (selling price) + desired profit 


  (total cost + profit)/quantity