Make money on each sale
Successful management of a business requires pricing to ensure profits.
My grandfather stated, “You don’t go broke making a profit.” How much you sell a product for is determined by many factors. Some are driven by what the market will bear. Others consider the products’ actual cost, the overhead and “what price the market will bear” to determine profit. While both approaches require keen market knowledge, knowing how to price your product for profit is a sure road to success.
Cost accounting begins with calculating the gross profit per unit. This is determined by understanding the difference between the cost of each unit and the sale price.
The formula for the gross profit per unit is:
Sales price – Cost of production = Gross
Once the gross profit per unit is determined, divide the overhead by the gross profit per unit to determine the number of units needed to breakeven. For more information on what overhead expenses are, see the Michigan State University Extension article “Proper pricing provides profit.”
The critical question that management needs to answer is whether or not the company can produce and also sell the quantity needed to breakeven. Gross profit from sales in excess of breakeven production will mean cash in the pocket for the business.