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Add next step in your pricing workflow by sending the cost price determined above to a calculator below
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User Guide
This tool will calculate the required cost, and necessary profit to make when selling an item, from the selling price or revenue needed, at the required level of percentage profit margin.
Formula
The formula used by this calculator to determine the cost and profit is:
C = SP · (100 – PM) / 100
P = SP – C
Symbols
- C = Cost
- SP = Selling price
- PM = Profit margin (%)
- P = Profit
Selling Price
This is the price that an item should be sold at to achieve the required percentage of profit margin. It represents the price a customer will pay before any tax is added.
Profit Margin
This is the percentage of the selling price which represents the profit that is made, or what is left after the deduction of cost. The profit margin is often referred to as gross profit margin, or contribution margin.
Typically it represents a contribution to the profitability of the business before general business overheads such as accounts, admin, customer services, sales and marketing have been deducted.
As an example, if a profit margin of 40% is needed when selling an item that cost $42, then the item should be sold for $70.
Since the profit cannot be greater than the selling price, it is impossible to have a profit margin greater than 100%, and a profit margin of exactly 100% is only possible if the cost is zero. If the profit margin is exactly zero, then the item is sold at cost price.
Cost
This is the purchase price to buy the item, or the internal cost to produce the item. There is more than one type of cost which could be used in this calculation, therefore it is important that the required profit margin is appropriate for the cost being considered.
For an internally manufactured item, the cost would be made up of the material and labour/manufacturing overhead costs.
For an outsourced purchased item, the cost would be the item purchase price and delivery charge paid before any tax was included.
In addition to this would be the general business overhead costs for administration, sales and marketing, however this would normally be incorporated into the required profit margin instead.
Profit
This is the amount of money contributed to the business by selling the item, and is determined by subtracting the cost from the selling price.
The profit may also be called gross profit or contribution, and would typically cover the general business overhead and net profit target assigned to the business operation.