11/10/22, 12:04 AM Lesson 1 Basic concept of cost: Costing and Pricing-MJMANGALILE

Lesson 1 Basic concept of cost

Concept of Costs
Costing is the way the entrepreneur calculates or works
out how much each individual product (goods or
service) costs to produce or sell.
Why product costing is important in every
manufacturing business?
Most small business owners don’t realize how expensive production can be. Understanding the
importance of costing can help your business avoid running into troubles such as loss of profits, time
mismanagement, and over budgeting.

Product costing is more than just setting a normal price; determining the right price for a certain
product can help the business to make data-driven decisions in the process.

Source: https://apptech-experts.com/2019/01/14/how-product-costing-can-make-or-break-your-
business/

WHY IS IT IMPORTANT TO COST BEFORE PRICING?

To be able to set the price of the product fairly and competitively.

COMPONENTS OF COSTS

1.  Direct or Variable Costs: Vary directly with the number of items made or sold. This include all
money spent for supplies and materials to make the product or to provide the service. For example
the cost of raw materials, packaging and labor.

2. Indirect or Fixed Costs:Are the business expenses or overheads that must be paid whether or
not its products are sold. Indirect costs include items such as rent, electricity, telephone, salaries,
insurance and depreciation’

Source: http://www.gov.vc/index.php/visitors/28-business/92-costing-pricing-your-products
(http://www.gov.vc/index.php/visitors/28-business/92-costing-pricing-your-products)
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In order to understand the general concept of costs, it is important to know the following types of
costs:

1. Accounting (https://www.toppr.com/guides/principles-and-practice-of-accounting/meaning-and-scope-of-
accounting/meaning-of-accounting/) costs and Economic costs
2. Outlay costs and Opportunity costs
3. Direct/Traceable costs and Indirect/Untraceable costs
4. Incremental costs and Sunk costs
5. Private costs and Social costs
6. Fixed costs and Variable costs

 
 
 
Concept of Costs in terms of Treatment
1.    Accounting costs. Accounting costs are those for which the
entrepreneur pays direct cash for procuring resources for
production. These include costs of the price paid for raw materials
and machines, wages paid to workers, electricity charges, the cost
incurred in hiring or purchasing a building or plot, etc. Accounting
costs are treated as expenses. Chartered accountants record them
in financial statements.
2.    Economic costs. There are certain costs that accounting
costs disregard. These include money which the entrepreneur
forgoes but would have earned had he invested his time, efforts
and investments in other ventures. For example, the entrepreneur
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would have earned an income had he sold his services to others

instead of working on his own business
Similarly, potential returns on the capital (https://www.toppr.com/guides/fundamentals-of-
accounting/accounting-process/capital-and-revenue-transactions/)  he employed in his business instead of
giving it to others, the output generated by his resources which he could have used for others’
benefits, etc. are other examples of economic (https://www.toppr.com/guides/fundamentals-of-
economics-and-management/basic-concepts-of-economics/)  costs.

Economic costs help the entrepreneur (https://www.toppr.com/guides/business-studies/entrepreneurship-

development/role-of-entrepreneurs-with-relation-to-enterprise/)  calculate supernormal profits
(https://www.toppr.com/guides/quantitative-aptitude/profit-and-loss/) , i.e. profits he would earn above the
normal profits by investing in ventures other than his.

Concept of Costs in terms of the Nature of Expenses

1.    Outlay costs. The actual expenses incurred by the
entrepreneur in employing inputs are called outlay costs
(https://www.toppr.com/guides/business-economics/theory-of-cost/cost-
concepts/) . These include costs on payment of wages, rent,
electricity or fuel charges, raw materials, etc. We have to treat them
are general expenses for the business.
2.    Opportunity costs. Opportunity costs are incomes from the
next best alternative that is foregone when the entrepreneur makes
certain choices.
For example, the entrepreneur could have earned a salary had he worked for others instead of
spending time on his own business. These costs calculate the missed opportunity and calculate
income that we can earn by following some other policy.

Concept of Costs in terms of Traceability

1.    Direct costs. Direct costs are related to a specific process or
product. They are also called traceable costs as we can directly
trace them to a particular activity, product or process.

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They can vary with changes in the activity or product. Examples of direct costs include manufacturing
costs relating to production, customer acquisition costs pertaining to sales, etc.

2.    Indirect costs. Indirect costs, or untraceable costs, are those

which do not directly relate to a specific activity or component of
the business. For example, an increase in charges of electricity or
taxes payable on income. Although we cannot trace indirect costs,
they are important because they affect overall profitability.
Concept of Costs in terms of the Purpose
1.    Incremental costs. These costs are incurred when the
business makes a policy decision. For example, change of product
line, acquisition of new customers, upgrade of machinery to
increase output are incremental costs.
2.    Sunk costs. Suck costs are costs which the entrepreneur has
already incurred and he cannot recover them again now. These
include money spent on advertising, conducting research, and
acquiring machinery.
Concept of Costs in terms of Payers
1.    Private costs. These costs are incurred by the business in
furtherance of its own objectives. Entrepreneurs spend them for
their own private and business interests. For example, costs
of manufacturing
(https://www.toppr.com/guides/geography/manufacturing-industries/what-
are-manufacturing-industries/) , production, sale, advertising, etc.
2.    Social costs. As the name suggests, it is the society that
bears social costs for private interests and expenses of the
business. These include social resources for which the firm does
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not incur expenses, like atmosphere, water resources and

environmental pollution.
Concept of Costs in terms of Variability
1.    Fixed costs. Fixed costs are those which do not change with
the volume of output. The business incurs them regardless of their
level of production. Examples of these include payment of rent,
taxes, interest on a loan, etc.
2.    Variable costs. These costs will vary depending upon the
output that the business generates. Less production will cost fewer
expenses, and vice versa, the business will pay more when its
production is greater. Expenses on the purchase of raw material
and payment of wages are examples of variable costs.

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11/10/22, 12:04 AM Lesson 2 Classification of cost: Costing and Pricing-MJMANGALILE

Lesson 2 Classification of cost

Costs can be classified into different categories for different purposes.

Costs may be categorized according to their:

1. Management function
2. Ease of traceability
3. Timing of charge against revenue
4. Behavior in accordance with activity
5. Relevance to decision making.

According to Management Function

1. Manufacturing costs- incurred in the factory to convert raw materials into finished goods. It
includes cost of raw materials used (direct materials), direct labor, and factory overhead.
2. Nonmanufacturing costs- not incurred in transforming materials to finished goods. These
include selling expenses (such as advertising costs, delivery expense, salaries and commission
of salesmen) and administrative expenses (such as salaries of executives and legal expenses).

According to Ease of Traceability

1. Direct costs- those that can be traced directly to a particular object of costing such as a
particular product, department, or branch. Examples include materials and direct labor. Some
operating expenses can also be classified as direct costs, such as advertising cost for a particular
product.
2. Indirect costs- those that cannot be traced to a particular object of costing. They are also called
common costs or joint costs. Indirect costs include factory overhead and operating costs that
benefit more than one product, department, or branch.

According to Timing of Charge against Revenue

1. Product costs- are inventoriable costs. They form part of inventory and are charged against
revenue, e. cost of sales, only when sold. All manufacturing costs (direct materials, direct labor,
and factory overhead) are product costs.
2. Period costs- are not inventoriable and are charged against revenue immediately. Period costs
include non-manufacturing costs, i.e. selling expenses and administrative expenses.

 
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According to Behavior in Accordance with Activity

1. Variable costs- vary in total in proportion to changes in activity. Examples include direct
materials, direct labor, and sales commission based on sales.
2. Fixed costs- costs that remain constant regardless of the level of activity. Examples include rent,
insurance, and depreciation using the straight line method.
3. Mixed costs- costs that vary in total but not in proportion to changes in activity. It basically
includes a fixed cost potion plus additional variable costs. An example would be electricity
expense that consists of a fixed amount plus variable charges based on usage.

According to Relevance to Decision Making

1. Relevant cost- cost that will differ under alternative courses of action. In other words, these costs
refer to those that will affect a decision.
2. Standard cost- predetermined cost based on some reasonable basis such as past experiences,
budgeted amounts, industry standards, etc. The actual costs incurred are compared to standard
costs.
3. Opportunity cost- benefit forgone or given up when an alternative is chosen over the other/s.
Example: If a business chooses to use its building for production rather than rent it out to tenants,
the opportunity cost would be the rent income that would be earned had the business chose to
rent out.
4. Sunk costs- historical costs that will not make any difference in making a decision. Unlike
relevant costs, they do not have an impact on the matter at hand.
5. Controllable costs- refer to costs that can be influenced or controlled by the manager. Segment
managers should be evaluated based on costs that they can control.

Sorce:https://www.accountingverse.com/managerial-accounting/cost-concepts/types-of-costs.html

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11/10/22, 12:04 AM Lesson 1 Introduction to pricing : Costing and Pricing-MJMANGALILE

Lesson 1 Introduction to pricing

What is pricing?

Price is not just a number on a tag. It comes in many forms and performs many functions. Rent,
tuition, fares, fees, rates, tolls, retainers, wages, and commissions are all the price you pay for some
good or service. Price also has many components. If you buy a new car, the sticker price may be
adjusted by rebates and dealer incentives.

Pricing is deciding what to charge for your goods or services.

       Factors affecting pricing:

1. How the Competition prices the goods and services you plan to provide.
2. Expectations about sales and expenses.
3. How much money the owner wants or needs to make.
4. Market tolerance.
5. Suppliers pricing terms and inventory costs. Some suppliers have established pricing for their
goods and services which are often pre-priced. Some franchisers also set the price of their
products.

Deciding what to change

The amount decided on must meet the following:

1. High enough to cover all costs of production.

2. Enable the entrepreneur to earn reasonable returns.
3. Low enough to encourage persons to keep on buying and to tell others about the product.

Four factors to focus on when setting price:

1. Knowledge of what your costs are

2. Knowledge of the prices your competitors are selling at
3. What customers are willing to pay

How the prices of new goods or services compare with that of existing ones

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11/10/22, 12:04 AM Lesson 2 Understanding Pricing: Costing and Pricing-MJMANGALILE

Lesson 2 Understanding Pricing

How Companies Price. Companies do their pricing in a variety of ways. In small companies, the
boss often sets prices. In large companies, division and product line managers do. Even here, top
management sets general pricing objectives and policies and often approves lower management’s
proposals.

Where pricing is a key factor, companies often establish a pricing department to set or assist others
in setting appropriate prices. This department reports to the marketing department, finance
department, or top management. Others who influence pricing include sales managers, production
managers, finance managers, and accountants.

For any organization, effectively designing and implementing pricing strategies requires a thorough
understanding of consumer pricing psychology and a systematic approach to setting, adapting, and
changing prices.

Consumer Psychology and Pricing. Marketers recognize that consumers often actively process
price information, interpreting it from the context of prior purchasing experience, formal
communications (advertising, sales calls, and brochures), informal communications (friends,
colleagues, or family members), point-of-purchase or online resources, and other factors.

Purchase decisions are based on how consumers perceive prices and what they consider the current
actual price to be—not on the marketer’s stated price. Customers may have a lower price threshold
below which prices signal inferior or unacceptable quality, as well as an upper price threshold above
which prices are prohibitive and the product appears not worth the money.

Understanding how consumers arrive at their perceptions of prices is an important marketing priority:
reference prices, price-quality inferences, and price endings.

Reference prices pricing information a consumer retains in memory that is used to interpret and
evaluate a new price.

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Price-quality inferences. Many consumers use price as an indicator of quality. Image pricing is
especially effective with ego-sensitive products such as perfumes, expensive cars, and designer
clothing.

Price endings. Many sellers believe prices should end in an odd number. Another explanation for
the popularity of “9” endings is that they suggest a discount or bargain, so if a company wants a high-
price image, it should probably avoid the odd-ending tactic. Prices that end with 0 and 5 are also
popular and are thought to be easier for consumers to process and retrieve from memory.

Pricing cues such as sale signs and prices that end in 9 are more influential when consumers’ rice
knowledge is poor, when they purchase the item infrequently or are new to the category, and when
product designs vary over time, prices vary seasonally, or quality or sizes vary across stores. They
are less effective the more they are used. Limited availability (for example, “three days only”) also
can spur sales among consumers actively shopping for a product.

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11/10/22, 12:04 AM Lesson 3 Setting the Price: Costing and Pricing-MJMANGALILE

Lesson 3 Setting the Price

A firm must set a price for the first time when it develops a new product, when it introduces its regular
product into a new distribution channel or geographical area, and when it enters bids on new contract
work. The firm must decide where to position its product on quality and price.

Steps in setting a pricing policy:

1. Selecting the Pricing Objective

2. Determining Demand
3. Estimating Costs
4. Analyzing Competitors’ Costs, Prices, and Offers
5. Selecting a Pricing Method
6. Selecting the Final Price

Step 1: Selecting the Pricing Objective

The company first decides where it wants to position its market offering. The clearer a firm’s
objectives, the easier it is to set price. Five major objectives are:

1. Survival
2. Maximum current profit
3. Maximum market share
4. Maximum market skimming
5. Product-quality leadership

Step 2: Determining Demand

Each price will lead to a different level of demand and have a different impact on a company’s
marketing objectives. The normally inverse relationship between price and demand is captured in a
demand curve: The higher the price, the lower the demand. For prestige goods, the demand curve
sometimes slopes upward. One perfume company raised its price and sold more rather than less!
Some consumers take the higher price to signify a better product. However, if the price is too high,
demand may fall.

Price sensitivity. The demand curve shows the market’s probable purchase quantity at alternative
prices. It sums the reactions of many individuals with different price sensitivities. The first step in
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estimating demand is to understand what affects price sensitivity. Generally speaking, customers are
less price sensitive to low-cost items or items they buy infrequently. They are also less price sensitive
when (1) there are few or no substitutes or competitors; (2) they do not readily notice the higher
price; (3) they are slow to change their buying habits; (4) they think the higher prices are justified;
and (5) price is only a small part of the total cost of obtaining, operating, and servicing the product
over its lifetime.

Methods in estimating demand curve:

1. Surveys
2. Price experiments
3. Statistical analysis

Price elasticity of demand. Marketers need to know how responsive, or elastic, demand is to a
change in price. If demand hardly changes with a small change in price, we say the demand is
inelastic. If demand changes considerably, demand is elastic.

Step 3: Estimating Costs

Demand sets a ceiling on the price the company can charge for its product. Costs set the floor. The
company wants to charge a price that covers its cost of producing, distributing, and selling the
product, including a fair return for its effort and risk. Yet when companies price products to cover their
full costs, profitability isn’t always the net result.

Types of costs and levels of production

 A company’s costs take two forms, fixed and variable.

Fixed costs, also known as overhead, are costs that do not vary with production level or sales
revenue. A company must pay bills each month for rent, heat, interest, salaries, and so on regardless
of output.

Variable costs vary directly with the level of production. For example, each hand calculator
produced by Texas Instruments incurs the cost of plastic, microprocessor chips, and packaging.
These costs tend to be constant per unit produced, but they’re called variable because their total
varies with the number of units produced.

Total costs consist of the sum of the fixed and variable costs for any given level of production.
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Average cost is the cost per unit at that level of production; it equals total costs divided by
production. Management wants to charge a price that will at least cover the total production costs at
a given level of production.

TARGET COSTING. Costs change with production scale and experience. They can also change as a
result of a concentrated effort by designers, engineers, and purchasing agents to reduce them
through target costing - deducting the desired profit margin from the price at which a product will
sell, given its appeal and competitors’ prices.

Step 4: Analyzing Competitors’ Costs, Prices, and Offers

Within the range of possible prices determined by market demand and company costs, the firm must
take competitors’ costs, prices, and possible price reactions into account. If the firm’s offer contains
features not offered by the nearest competitor, it should evaluate their worth to the customer and add
that value to the competitor’s price. If the competitor’s offer contains some features not offered by the
firm, the firm should subtract their value from its own price. Now the firm can decide whether it can
charge more, the same, or less than the competitor.

Step 5: Selecting a Pricing Method

Given the customers’ demand schedule, the cost function, and competitors’ prices, the company is
now ready to select a price. The three major considerations in price setting:

1. Costs set a floor to the price.

2. Competitors’ prices and the price of substitutes provide an orienting point.
3. Customers’ assessment of unique features establishes the price ceiling.

Six price-setting methods: markup pricing, target-return pricing, perceived-value pricing, value
pricing, going-rate pricing, and auction-type pricing.

1. MARKUP PRICING The most elementary pricing method is to add a standard markup to the
product’s cost.

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2. TARGET-RETURN PRICING In target-return pricing, the firm determines the price that yields its
target rate of return on investment.

3. PERCEIVED-VALUE PRICING. Perceived value is made up of a host of inputs, such as the

buyer’s image of the product performance, the channel deliverables, the warranty quality,
customer support, and softer attributes such as the supplier’s reputation, trustworthiness, and
esteem. Companies must deliver the value promised by their value proposition, and the customer
must perceive this value. Firms use the other marketing program elements, such as advertising,
sales force, and the Internet, to communicate and enhance perceived value in buyers’ minds.

4. VALUE PRICING In recent years, several companies have adopted value pricing: They win loyal
customers by charging a fairly low price for a high-quality offering. Value pricing is thus not a
matter of simply setting lower prices; it is a matter of reengineering the company’s operations to
become a low-cost producer without sacrificing quality, to attract a large number of value
conscious customers.

5. GOING-RATE PRICING In going-rate pricing, the firm bases its price largely on competitors’
prices. In oligopolistic industries that sell a commodity such as steel, paper, or fertilizer, all firms
normally charge the same price. Smaller firms “follow the leader,” changing their prices when the
market leader’s prices change rather than when their own demand or costs change. Some may
charge a small premium or discount, but they preserve the difference.

6. AUCTION-TYPE PRICING Auction-type pricing is growing more popular, especially with scores of
electronic marketplaces selling everything from pigs to used cars as firms dispose of excess
inventories or used goods. These are the three major types of auctions and their separate pricing
procedures:
7. English auctions (ascending bids)
8. Dutch auctions (descending bids)
9. Sealed-bid auctions

Step 6: Selecting the Final Price

Pricing methods narrow the range from which the company must select its final price. In selecting
that price, the company must consider additional factors, including the impact of other marketing

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activities, company pricing policies, gain-and-risk-sharing pricing, and the impact of price on other
parties.

Sources: http://www.gov.vc/index.php/visitors/28-business/92-costing-pricing-your-products

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CVP analysis looks at the effect of sales volume variations on costs and operating profit. The
analysis is based on the classification of expenses as variable (expenses that vary in direct
proportion to sales volume) or fixed (expenses that remain unchanged over the long term,
irrespective of the sales volume). Accordingly, operating income is defined as follows:

● Operating Income = Sales – Variable Costs – Fixed Costs

○ Sales minus Variable Costs minus Fixed Costs is equal to Operating Income

A CVP analysis is used to determine the sales volume required to achieve a specified profit
level. Therefore, the analysis reveals the break-even point where the sales volume yields a net
operating income of zero and the sales cut-off amount that generates the first dollar of profit.

Cost-volume profit analysis is an essential tool used to guide managerial, financial and
investment decisions.
The first step required to perform a CVP analysis is to display the revenue and expense line
items in a Contribution Margin Income Statement and compute the Contribution Margin Ratio.

A simplified Contribution Margin Income Statement classifies the line items and ratios as
follows:

Contribution Margin Income Statement

Statement Item Amount Percent of Income

Sales 100 100%

(Deduction) Variable Costs 60 60%

(Total) Contribution Margin 40 40%

(Deduction) Fixed Costs 30 30%

(Total) Operating Income 10 10%

Table 1. Contribution Margin Income Statement. The table shows the percent of income for
sales, contribution margin, and operating income are observed as totals, after variable and fixed
cost deductions.

Contribution Margin Percentage

The method relies on the following assumptions:

● Sales price per unit is constant (i.e. each unit is sold at the same price);
● Variable costs per unit are constant (i.e. each unit costs the same amount);
● Total fixed costs are constant (i.e. costs such as rent, property taxes or insurance do
not vary with sales over the long term);
● Everything produced is sold;
● Costs are only affected because activity changes.
The equation: Operating Income = Sales – Variable Costs – Fixed Costs

● Sales = units sold X price per unit

○ Units sold times price per unit is equal to Sales
● Variable Costs = units sold X cost per unit
○ Units sold times costs per unit is equal to Variable Costs

The first equation above can be expanded to highlight the components of each line item:

● Operating Income = (units sold X price per unit) – (units sold X cost per unit) – Fixed
Cost
○ Units sold times Price per unit minus units sold times cost per unit minus fixed
cost is equal to Operating Income

The contribution margin is defined as Sales – Variable Costs. Therefore,

● Contribution Margin ($) = Sales - Variable Costs

○ Sales minus Variable costs is equal to contribution margin
● Contribution Margin ($) = (units sold X price per unit) – (units sold X cost per unit)
○ Units sold times price per unit minus units sold times cost per unit is equal to
contribution margin

And the Contribution Margin Percentage (CM %) is computed as follows:

● Contribution Margin Percentage = Sales - Variable Costs / Sales

○ Sales minus Variable Costs divided by Sales is equal to Contribution Margin
Percentage
● Contribution Margin Percentage = Contribution Margin ($) / Sales ($)
○ Contribution Margin ($) divided by Sales ($) is equal to Contribution Margin
Percentage

Accordingly, the following is another way to express the relationship between contribution
margin, CM percentage, and sales:

● Contribution Margin $ = Sales $ X Contribution Margin %

○ Sales times Contribution Margin Percentage is Contribution Margin ($)

The contribution margin percentage indicates the portion each dollar of sales generates to pay for
fixed expenses (in our example, each dollar of sales generates $.40 that is available to cover the
fixed costs).

As variable costs change in direct proportion (i.e. in %) of revenue, the contribution margin also
changes in direct proportion to revenues, However, the contribution margin percentage remains
the same.
CVP analysis is conducted to determine a revenue level required to achieve a specified profit.
The revenue may be expressed in the number of units sold or in dollar amounts.

Income Statement

Statement Item Amount Percent of Income

Sales (20 units X $5) 100 100%

(Deduction) Variable Costs (20 units X $3) (60) (60%)

(Total) Contribution Margin 40 40%

(Deduction) Fixed Costs (30) (30%)

(Total) Operating Income 10 10%

Table 2. Income Statement. The table shows an income statement that observes total income
from sales, contribution margin total after variable cost deduction, and operating income total
after fixed cost deduction.

How much sales is required to achieve a $20 profit?

This can be answered by finding the number of units sold or the sales dollar amount.
Required number of units sold:

● Profit = Revenues – Variable Costs – Fixed Costs

○ Revenue minus Variable Costs minus Fixed Costs is equal to Profit

$20 = (Units Sold X $5) – (Units Sold X $3) – $30

$50 = (Units Sold X $5) – (Units Sold X $3)

Sales deducted from Variable Costs is the definition of contribution margin

$50 = (Units Sold) X ($5-$3)

($5-$3=$2 which is the $ contribution margin per unit)

$50/$2 = 25 Units sold needed to achieve $20 in profit

● Units Sold to achieve targeted profit = Fixed Costs ($) + Targeted Profit ($) /
Contribution Margin Dollar Per Unit
○ Fixed costs dollars plus Targeted Profit Dollar divided by Contribution Margin
Dollar Per Unit is equal to Units sold to achieve targeted profit

Income Statement

Statement Item Dollar Percent of

Amount Income

Sales (25 units X $5) $125 100%

(Deduction) Variable Costs (25 units X $3) ($75) (60%)

(Total) Contribution Margin (25 units X $2) $50 40%

(Deduction) Fixed Costs ($30) (30%)

(Total) Targeted Operating Income $20 10%

Table 3. Income Statement. The table shows an income statement that observes sales,
contribution margin, and targeted operating income totals, after variable and fixed cost
deductions.

Note: while Operating Income doubled, (from $10 to $20) only 5 additional units sold (+25%)
were required as only variable costs changed while fixed costs remained at $30.

1. Required sales dollar amount

Profit $ = sales $ – Variable Costs $ – Fixed Costs $

and

Sales $ – Variable Costs $ = Contribution Margin $

So,

Profit $ = Contribution Margin $ – Fixed Costs $

We saw earlier that Contribution

Margin $ can be expressed as:

Sales X Contribution Margin %

Contribution Margin $ = (Sales $ x Contribution Margin %)

Profit $ = (Sales $ x Contribution Margin %) – Fixed Costs $

Profit $ + Fixed Costs $ = (Sales $ x Contribution Margin %)

(Targeted Profit $ + Fixed Expense $) / Contribution Margin % = Sales $

Verification:

Sales required to achieve $20 in targeted profit:

($20 + $30) / 40% = $125

FORMULAS:

Operating Income = Sales – Variable Costs – Fixed Costs

Operating Income = (units sold X price per unit) – (units sold X cost per unit) – Fixed Cost

Sales = Units sold X Price per unit

Variable Costs = Units sold X Cost per unit

Contribution Margin ($) = Sales - Variable Costs

Contribution Margin ($) = (units sold X price per unit) – (units sold X cost per unit)

Contribution Margin Percentage = Sales - Variable Costs / Sales

Contribution Margin Percentage = Contribution Margin ($) / Sales ($)

Profit = Revenues – Variable Costs – Fixed Costs

Targeted Profit = Revenues − Variable costs − Fixed costs or GIVEN

Units Sold to achieve targeted profit = Fixed Costs ($) + Targeted Profit ($) / Contribution
Margin Dollar Per Unit