http://www.business.govt.nz/tools-and-templates/educational-resources/pricing-products PRICING PRODUCTS Simple markup In a retail situation it is usual to add a mark-up to the direct (variable) costs of buying relatively similar goods in order to cover estimated overheads (fixed costs). This markup is then applied to all goods made or purchased. The steps are: Estimate direct (variable) costs for the next year This will involve analysing the quantities of products sold in recent years and estimating the quantity likely to be sold next year (see the Estimating Sales topic). Then allowing for expected prices from suppliers for the coming year, estimate the cost price of this volume of products. Estimate fixed costs for the next year Estimating overhead costs will generally involve the following steps: (a) identify all overhead costs (including owner’s return or profit) (b) estimate the annual cost for each overhead Calculate the markup percentage The products estimates in Step 1 must be sold for the their own cost price plus an extra amount to cover the estimated fixed costs estimated in Step 2. Calculate the fixed costs as a percentage of the product costs, and this is the extra that must be added to each product when sold: Markup percentage = Fixed costs Estimated product costs

1. Pricing Products

2. Cost Behaviour
1. Direct Labour and Direct Materials are Variable Costs:
– Expenses that tend to change in direct proportion to the volume of
sales. Generally these will be the costs in preparing goods and
services for resale.
– For example: raw materials, production wages.
2. Overheads and indirect costs are generally Fixed Costs:
– Expenses that do not vary (in the short term) with the volume of
activity. In the Profit & Loss Statement these will be the Selling,
Administration, and Financial Expenses.
– For example: rent, management salaries, interest.
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3. 1. Markup on Direct Materials
For example in retail…
Add a mark-up to the direct costs of making or buying relatively similar
goods to cover estimated Overheads.
Example:
Cost of materials to be sold (or stock purchases) $150,000
Expected wages (if any) 10,000
Estimated overheads for year 14,000
Desired profit for owner 36,000
Total of other costs and overhead to recover… $ 60,000
60,000
Markup required: = 40%
150,000

4. Exercise
Calculate the required markup percentage:
Cost of materials to be sold (or stock purchases) $125,000
Expected wages (if any) 25,000
Estimated overheads for year 10,000
Desired profit for owner 40,000
Total of other costs and overhead to recover… $ 75,000
75,000
Markup required: = 60%
125,000

5. Another exercise
Calculate the required markup percentage for each product:
Expected wages for staff 30,000
Estimated expenses for year 10,000
Desired profit for owner 50,000
Total overheads to allocate $ 90,000
?
Item A Item B
Overheads are to be allocated /
2 3 /
1 3
Stock purchases expected to be $120,000 $150,000
Markup required: 60,000 30,000
120,000 150,000
= 50% = 20%

6. Working with Mark-Ups
Be careful working with percentages
Mark-up can be expressed as a percentage onto cost, or alternatively as a
percentage of the selling price.
(The percentage stated will be different).
Example: Price = cost + mark-up
$125 = $100 + $25
20% Profit Margin 25% Mark-up on Cost
Mark-up: The percentage that the cost price is increased by, to arrive at
the selling price.
Margin: How much of the selling price is markup for the business.

7. Summary
Understanding the relationship between costs, prices,
volume of output, and profit is important.
•Desired profit should be treated as a cost to be recovered
•If costs (including profit) are known, then:
– Estimating volume (hours of work, or units to be sold) allows you to
calculate the price to be charged
– Estimating price allows you to calculate the volume required to be
sold (breakeven)
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8. Find Out More
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