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How much is it?. Pricing you good or services so that you make a profit – one that will keep you in the lifestyle you wish to become accustom to!. Setting prices. We need to set a price that customers will be willing to pay and it must cover all our costs but it must also make a profit.

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## How much is it?

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**How much is it?**Pricing you good or services so that you make a profit – one that will keep you in the lifestyle you wish to become accustom to!**Setting prices**• We need to set a price that customers will be willing to pay and it must cover all our costs but it must also make a profit. • After all, people go into business to make a profit.**Pricing**• It is one of the more tricky areas of business. • Prices can be determined by • what your competitors charge, • the government, • your costs.**Break Even Analysis**• Prices can be calculated using costs that the business pays. • Cost is different to what we pay for stock or materials because it’s the unit cost not the total cost we use. • The business buys 500 yo-yos which total $1250. • But sells only one! Which means they have only incurred $2.50 cost of goods sold because the rest of the yo-yos still belong to the business.**Fixed and Variable Costs**• Costs are divided into: • Variable • Fixed for the purpose of Break Even Analysis**Variable costs - examples**• Materials used to make the goods: • Wood made into a wooden toy. • Freight to get the toys to the shops. • Chemicals to make toothpaste. • or used to perform the service: • Fuel for the mower in a lawn mowing business.**What are we selling?**• We are selling toothpaste for chickens. • It cost $50.00 to make per tube. • This is expensive but good.**Work out Total Variable cost**• Variable costs are those which vary directly with the amount of goods or services sold.**Graphing Variable Costs**• If we take the information from the table, we can create a graph… • …where the line increases with every sale.**So?**• The graph shows that every time we sell a tube of toothpaste, variable cost rise. • If we sell no toothpaste, we incur no variable cost. • If we sell 50 tubes of toothpaste, variable cost is $2500.00 (or 50 tubes by $50.00 each).**The other Costs**• If it is a cost which is not used up with each sale, then it is NOT a variable cost. • But what is it?**Work out Total Fixed Costs**• Fixed costs are those payments which have to be paid regardless of the number of sales you make. Wages $2000.00 Rent $1000.00 Lease payments $500.00 Telephone $150.00 Total $3650.00**Graphing Fixed Costs**• Again when we put the information from the Fixed Cost table into a graph…**And?**• This time we get a straight line because Fixed costs don’t vary with the number of sales. • If we make one sale, Fixed Costs are $3650 and if we make 100 it is still $3650**Total Costs**• If we graph Fixed Costs and Variable Costs, we get Total Costs per unit…**Total Cost Graph**What’s the green line? Total costs**Recap - Do we know the difference between Variable and**Fixed? Flour = 50¢ per pizza Meat = 60¢ per pizza Cheese = 90¢ per pizza Petrol = $2.00 per pizza Rent $600 Wages $400 Variable Cost 50¢ + 60¢ + 90¢ + $2 = $4 Fixed Cost $400 + $600 = $1000**What did you notice?**• Variable costs are usually smaller than Fixed. • Variable costs are usually ‘per’ something. • Fixed costs are larger than Variable. • Fixed costs are total amounts.**Break Even Point**• This is the point at which revenue (income) equals expenses (costs). • That is, there is no profit or loss made. • If the selling price of our items is $100.00, then…**Calculating Break Even Point**Total Fixed costs Selling price - Variable Costs per unit 3650.00 = 73 units 100.00 - 50.00**This means…**• When the business sells 73 units of toothpaste there will be no profit or loss. • If the business sells less that 73 units, there will be a loss which is recorded in brackets. • If the business sells more than 73 units, it will make a profit. The more it sells, the more profit.**If we put all the graphs together**• We can see where the Break Even Point is…**At 72.70 units**Break Even Point**Break Even Point – Profit & Loss Statement**Revenue is earned by the business when they sell stock / goods. Expenses are payments for things the business does not own but need to make revenue.**But…**• We want to make a profit! • We want to have money to take home! • We want to buy a Porsche!!! • So we use a different formulae…**Calculating the selling price to make a profit**Total Fixed costs + Profit Selling price - Variable Costs 3650.00 + 2000.00 = 113 units 100.00 – 50.00**Result**• The business has to sell more units to cover costs and make the profit.

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