* Increase the advertising budget * Give your daughter money to buy a new dress * Select a cheaper long distance phone service * Remodel your building All of these decisions increase, or decrease your cost of operations affecting what is left as profit. When deciding how to price the goods or services to be sold, the owner must take into consideration the costs of all decisions made. Some decisions will result in higher sales which will more than make up for increased costs. It is thought that appropriate advertising will do this. Or if you pay your employees more they may be willing to work harder and increase sales. However, nothing is really sure about these decisions and their effect on profits. So business owners often decide to use a percentage of the product costs in determining their selling prices. The percentage is based on distributing the costs of running the business (overhead) and profits in an equal manner to all items sold, based on the product costs. This is called markup. Think of markup as the share of the consumer's price that is necessary to run the business, plus what is left over as return on the owner's investment. The markup on all the products sold, added together, is designed to cover the costs of running the business and making a profit. Business owners use past experience and experience of similar businesses to determine the expected overhead costs and profit they hope to make. This is called their margin...the amount of money available after the costs of products sold are deducted from the income from sales. If your sales equal $1 million and your product costs are $200,000, your margin is $800,000. Remember, this is not your profit. We hope by now you can explain why this is so. If not, please read this article again. LET'S PRACTICE MAKING A PROFIT This is the story of Goodies Gift Shop in its third year of operation in Small Town USA. Amelia Goodies, the owner, runs the shop with 4 full time employees, 2 part timers and herself. Her sales last year were $500,000 and her profit was $20,000 after taxes. If her balance sheet shows a net worth of $100,000 can you tell us what her return on investment was last year? Balance Sheet ( Year 2)
* Increase the advertising budget * Give your daughter money to buy a new dress * Select a cheaper long distance phone service * Remodel your building All of these decisions increase, or decrease your cost of operations affecting what is left as profit. When deciding how to price the goods or services to be sold, the owner must take into consideration the costs of all decisions made. Some decisions will result in higher sales which will more than make up for increased costs. It is thought that appropriate advertising will do this. Or if you pay your employees more they may be willing to work harder and increase sales. However, nothing is really sure about these decisions and their effect on profits. So business owners often decide to use a percentage of the product costs in determining their selling prices. The percentage is based on distributing the costs of running the business (overhead) and profits in an equal manner to all items sold, based on the product costs. This is called markup. Think of markup as the share of the consumer's price that is necessary to run the business, plus what is left over as return on the owner's investment. The markup on all the products sold, added together, is designed to cover the costs of running the business and making a profit. Business owners use past experience and experience of similar businesses to determine the expected overhead costs and profit they hope to make. This is called their margin...the amount of money available after the costs of products sold are deducted from the income from sales. If your sales equal $1 million and your product costs are $200,000, your margin is $800,000. Remember, this is not your profit. We hope by now you can explain why this is so. If not, please read this article again. LET'S PRACTICE MAKING A PROFIT This is the story of Goodies Gift Shop in its third year of operation in Small Town USA. Amelia Goodies, the owner, runs the shop with 4 full time employees, 2 part timers and herself. Her sales last year were $500,000 and her profit was $20,000 after taxes. If her balance sheet shows a net worth of $100,000 can you tell us what her return on investment was last year? Balance Sheet ( Year 2)
Foods%20II%20Enterprise%204.0.docx