TAILIEUCHUNG - Ebook Practical financial management (7th edition): Part 2
(BQ) Part 2 book "Practical financial management" has contents: Costs, volume, pricing and profit decisions; improving performance, revenue budgets, capital budgets, preparing a business plan, computing taxes, alternative legal structures, directors’ roles and responsibilities. | Practical Management-Small Business 51-106:Fin Man/Small Busi 6th 43-136 25/6/08 7 Costs, volume, pricing and profit decisions In the preceding chapters we have seen how business controls can be developed. These can be used to monitor performance against the fundamental objectives of profitability, and the business’s capacity to survive. So far we have taken certain decisions for granted and ignored how to cost the product or service we are marketing, and, indeed, how to set the selling price. These decisions are clearly very important if you want to be sure of making a profit. Adding up the costs At first glance the problem is simple. You just add up all the costs and charge a bit more. The more you charge above your costs, provided the customers will keep on buying, the more profit you make. Unfortunately as soon as you start to do the sums the problem gets a little more complex. For a start, not all costs have the same characteristics. Some costs, for example, do not change however much you sell. If you are running a shop, the rent and rates are relatively constant figures, completely independent of the volume of your sales. On the other hand, the cost of the products sold from the shop is completely dependent on volume. The more you sell, the more it costs you to buy in stock. Rent and rates for shop Cost of 1,000 units of volume of product £ 2,500 1,000 Total costs 3,500 14:31 Page 83 Practical Management-Small Business 51-106:Fin Man/Small Busi 6th 43-136 84 25/6/08 Understanding the figures You can’t really add up those two types of costs until you have made an assumption about volume – how much you plan to sell. Look at the simple example above. Until we decide to buy, and we hope sell, 1,000 units of our product, we cannot total the costs. With the volume hypothesised we can arrive at a cost per unit of product of: Total costs ÷ Number of units = £3,500 ÷ 1,000 = £ Now, provided we sell out all the above at £, we shall always be .
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