Business and Personal Finance © 2007

Chapter 22: Pricing, Costing, and Growth

Chapter Summaries

• In merchandising businesses, product cost-plus pricing is used: A markup based on the cost of the item is added to the actual cost. The markup percentage covers business expenses plus profit margin.
• Variable costs, such as direct materials and direct labor, change in proportion to production levels. Fixed costs remain constant despite production level changes.
• By determining the contribution margin and break-even point, a business can set attractive prices that also ensure a profit for the business.
• Businesses grow by increasing customers, sales, market share, markets, number of employees, lines of merchandise, and profits.
• Profit planning occurs by setting target profit goals and estimating a margin of safety-target sales minus break-even sales.
• Target sales needed to reach a target profit is equal to variable costs, plus fixed costs, plus target profits. The margin of safety is the amount that sales can drop before the business experiences a loss. This is equal to the target sales minus the break-even sales.
• Planning for growth will enable you to grow in a controlled way and to be prepared and able to take advantage of growth opportunities when they appear.