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