CostingPrice structures and overhead costs should be taken into account and a complete business plan including all costs should be drawn up so that you will eliminate (to an extent) nasty surprises.
To make the most profit, you need to understand the principle of higher volume equals lower overhead costs, which in turn should render higher profits.
You have to establish the right selling price for a product or service. This will help you get and keep the customer and also enable you to make a profit.
One has many expenses when a new business is started. Stock and materials have to be bought, machinery and equipment acquired, salaries and rent have to be paid, money must be kept for bad times, etc, etc..
Due to the above, the right selling price must be attained. You must cover all your overheads (your salary being part of the overheads) and make enough profit.
Sometimes it pays not to sell your product to a particular market because the profit that you will be making is too low.
Three basic costs have to be taken into account when establishing the right selling price for a product or service. These are:
1. Cost of Production,
2. Business costs and
1. Cost of ProductionAlso known as variable cost because the cost of the product varies according to the customer's needs. Example: A simple "economy" product will cost less to manufacture than a standar luxurious product due to the variance in the amount of raw materials.
The cost of materials used to make the item thus varies all the time. Mistakes add to the price.
2. Business CostsAlso known as overheads, these are the fixed running costs of the business that has to be paid whether you have customers or not. These would include items such as rent, telephone, salaries (including your own), insurance, petrol, etc. Keep these costs low. Work with what you really need NOW, not what you think you need or would like to have.
3. ProfitProfit is used to grow your business, in other words, to buy more stock.
Profit is also saved for difficult times, for you pension or retirement. Profit is savings, which is a business safety net.
People think that their salary comes from profit. This should not be true.
Your salary should be a regular business expense.
It is important that you extensively shop around when purchasing machinery, tools, materials etc. Prices can vary tremendously. The more you pay for your materials used in manufacturing, the more costly your product becomes. That means less profit!
When running a business, it is your business to manufacture OR BUY A PRODUCT FOR AS LITTLE AS POSSIBLE (Without Compromising on Quality) AND SELL IT FOR AS MUCH AS POSSIBLE!
All three of the above must be taken into account when the selling price of a product or service is worked out.