Determining the Price of a Product or Service Two factors to consider: 1. The cost of doing business 2. Intended profit
Determining the Price of a Product or Service
Two factors to consider:
1. The cost of doing business
2. Intended profit
Profit: The amount of money left over after all products are paid for and all expenses are covered
Price = Cost of Doing Business + Profit
1. Markup
The amount of money a business adds to the cost of a product
Expressed as a % Markup is used to cover all expenses plus
make a profit
Markup = $ Amount Store Adds Cost
2. Margin
The percentage of the price charged to customers that is not used to pay for the product
Margin = $ Amount Store Adds Selling Price
Markup and Margin Question
Cody needs to make some extra money to buy Christmas presents for all of his ladies so he opens a hotdog stand on Bank St.
Markup and Margin Question
He pays $0.30 for every hotdog that he sells. Propane and condiments cost him an
additional $0.22 per hotdog. He wants to make $0.23 profit per hotdog
Answers
Price = Cost of doing business + profit
= $0.30 + 0.22 + 0.23 = $0.75
Markup = $ Amount store adds / cost
= $0.22 + 0.23 / 0.30
= $0.45 / 0.30
= 1.5 OR 150%
Answers
Margin = $ Amount store adds / selling price
= $0.22 + 0.23 / $0.75
= $0.45 / $0.75
=0.6 OR 60%
Break-Even Analysis
Three parts to break-even analysis:
1. Variable Costs: Costs that depend on the quantity of products or services sold
Example:
Break-Even Analysis
2. Fixed Costs: Costs that are constant. These do not depend on the quantity of sales.
Example:
Break-Even Analysis
3.
Sometimes called Contribution Margin
Example:
Gross Profit = Selling Price – Variable Costs
Break-Even Analysis
3. Gross Profit Example Selling Price = $1.49 Variable Cost = $0.35 GP = Selling Price - VC
Therefore, $1.14 of Gross Profit is made with every sale of an Iced Cap
This is used to pay for Fixed Costs
Break-Even Point
Again, Break-Even Point (BEP) is the # of units that must be sold at a given price to cover all operating costs
BEP = Fixed Costs Gross Profit
Break-Even Point
Back to Cody He pays $0.30 for every hotdog $0.22 for gas and condiments per hotdog Sells hotdogs for $0.75 each Pays $200/month to rent the cart (Fixed)
What is Cody’s BEP?
Gross Profit = Selling Price – VC
= $0.75 – 0.30 – 0.22 = $0.23
BEP = FC / Gross Profit
= $200 / $0.23
= 870 hotdogs
What is Cody’s BEP?
Therefore, Cody has to sell 870 hotdogs in order to cover the cost of renting the cart.
If he doesn’t sell 870 he will lose money!
Pricing and BEP Example
Subway has the following costs for a 6”assorted sub it sells: Bread = $0.37 Meat = $1.68 Toppings = $0.39 Expenses = $1.30 (includes all other FC
and VC) Subway wants to make $1.25 per sub
What is the Gross Profit?
Assuming that: Bread = $0.37 Meat = $1.68 Toppings = $0.39 Expenses = $1.30 (includes all other FC
and VC) Other VC = $0.90
What is the BEP?
Assume that Subway pays the following monthly Fixed Costs:
Wages $12,500 Rent $2,100 Hydro $800