# Pricing Products and Services

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4 Summary In summary, the primary purpose in operating a business is to make a profit. Prices should be established from an accurate accounting of direct costs, lab, overhead expenses, and profit margin. Wholesaling products to retailers adds another dimension to pricing that must be taken into consideration. In addition, careful thought of all facts that may have an impact on the business should be considered as a pricing strategy is established. Pricing is a skill that must be developed and continuously monited in der f a business to be successful and profitable. Basic Pricing - Part III Breakeven Analysis Prices charged must exceed total costs there is no reason to be in business. A method business owners use to look at the big picture f pricing is breakeven analysis. Defined in its simplest fm, the breakeven point is the point at which sales (revenues) are exactly equal to costs (expenses). At this point, zero profit is made and zero losses are incurred. This approach is helpful in determining the number of units of a product the dollar amount of sales necessary to cover all costs. This makes it possible to determine how much of a product must be sold to cover costs. The basic equation used f determining the breakeven point is: sales = variable expenses + fixed expenses Since profit is defined as zero at the break-even point, sales must, by definition, be equal to total expenses. F example, let X represent the number of units to be sold to break even (zero profit). Suppose the cost per unit of X is \$.45, the selling price per unit is \$1.00, and there is a fixed cost of \$275 to manufacture product X. How many units of X must be sold to break even? Going back to the equation and listing the known values results in: 1.00X =.45X X -.45X = X = 275 X = 500 In this case 500 units of X must be sold to cover all costs. In dollar terms, the breakeven point is \$500 in sales of product X (500 \$1.00 per unit). Using the same example, suppose you want a profit of 20 percent of sales. What effect would this have on the breakeven volume? Since profit is defined as a percentage of sale, the initial equation changes to include the profit calculation: sales = variable expenses + fixed expenses + profit 1.00X =.45X (1.00X), where.20(1.00x) is the profit term, since profit is defined as 20 percent of sales (1.00 per unit times the number of units). The equation then becomes: 1.00X -.45X -.20X = X = 275 X = 786 To cover all costs associated with product X and to make a 20 percent profit on sales, 786 units must be sold. Total sales volume in this case will now be \$786 (\$1.00 times 786).

5 Going back to the example used earlier, where the selling price per unit was \$30, and the cost per unit was \$25, and the fixed cost was \$5 --- and inserting these values into the equation --- you can see the fmula wks as intended: 30X = 25X X - 25X = 5 5X = 5 X = 1 Breakeven analysis permits the business owner to look at the pricing strategy using different combinations and variations of variables to determine necessary productions levels, unit pricing, costs, and desired profit.

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