Profit Analysis & Pricing


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Definitions and terms used in Profit Analysis & Pricing

Selling Price per Unit
The price that a unit is expected to be sold for.
Selling Units
The number of units expected to be sold (determined by a contract or market research).
Fixed Cost (FC)
The cost that remains constant within a range of production or sales, regardless of the number of units produced or sold within that range. Typical fixed costs are: rent, mortgage, equipment, salaries, insurance, fixed utilities (office utilities) etc.
Variable Cost per Unit
The cost that vary with the production or the purchase of one unit.
Total Variable Cost (VC)
The cost that varies directly with the number of units produced or sold. Typical variable costs are: materials, packaging and shipping, sales commission, hourly wages, variable utilities (factory utilities) etc.
Total Variable Cost = Selling Units x Variable Cost per Unit
Total Cost (TC)
Total expenses incurred in the process of producing or selling a number of units.
Total Cost (TC) = Fixed Cost (FC) + Total Variable Cost (VC)
Total Revenue
The total sales value of the units produced or sold.
Total Revenue = Selling Units x Selling Price per Unit
The benefits from producing or selling a number of units.
Profit = Total Revenue – Total Cost
Target Profit
The profit that the company intend to realize.
Target point
The point where the Target Profit is realized.
Profit margin
The ratio of profitability calculated as Profit divided by Total Revenue. Profit margin is an indicator of a company’s pricing policies and its ability to control costs. It measures how much out of every dollar of sales a company actually keeps in earnings (expressed as a percentage).
Profit Margin = (Total Revenues – Total Cost) / Total Revenues x 100
The amount added to the cost of a product to cover expenses and profit in fixing the selling price. Markup is equal to profit.
Markup percent
The ratio calculated as Markup divided by Total Cost. It measures how much is added to the cost in order to determine the selling price.
Markup percent = (Total Revenues – Total Cost) / Total Cost x 100