Two Factors Affecting Price (s)

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16 Nov 2010
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CHAPTER 7 & 8
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TWO FACTORS AFFECTING PRICE:
1. The cost of doing a business
2. The profit a company hopes to make
KEY TERMS:
- Profit: money left over once all expenses are paid.
- Gross Profit: selling price minus the variable cost. Also known as contribution margin because its
money that contributes to the paying of fixed cost
- Variable Costs: depends on the quantity of goods sold or service preformed. Mostly used in the
actual production or service.
Example: raw materials, ingredients, commissions, etc.
- Fixed Costs: are constant, independent of sales or other variable.
Example: rent, salaries, utilities
- Break-even point: number of units a business must sell at a given price to cover its costs.
- Economics of Sales: the more products a company makes, the lower the cost of production for
each item.
WAYS TO USE ECONOMICS OF SALES:
1. Develop Products for Private-Label Companies:
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2. Creating a Barrier to Entry for Competitors:
- Having a low price to discourage from new companies entering the market. Low prices
will lead to increase in volume, thus lower cost per unit
- Example: Wal-Mart
3. Creating New Brands:
- Making the same product, under a different Brand Name
- Example: Gap = Old Navy & Banana Republic
4. Merging with Competitions:
- Reduce fixed costs because you are selling more but with less fixed costs
- Example: TELUS & Clearnet , Sprint Canada & Rogers
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Document Summary

Two factors affecting price: the cost of doing a business, the profit a company hopes to make. Profit: money left over once all expenses are paid. Gross profit: selling price minus the variable cost. Also known as contribution margin because its money that contributes to the paying of fixed cost. Variable costs: depends on the quantity of goods sold or service preformed. Mostly used in the actual production or service. Fixed costs: are constant, independent of sales or other variable. Break-even point: number of units a business must sell at a given price to cover its costs. Economics of sales: the more products a company makes, the lower the cost of production for each item. Ways to use economics of sales: develop products for private-label companies: yyz: creating a barrier to entry for competitors: Having a low price to discourage from new companies entering the market. Low prices will lead to increase in volume, thus lower cost per unit.

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