Cost-Plus Pricing Quiz

Cost-Plus Pricing Strategy

• Allows for easy calculation of minimum price covering all costs and ensuring desired profitability.

Variable Cost

• Costs that fluctuate based on production or sales levels.

Selling Price

• The amount a customer pays for a product, including the product cost and any seller markup.

Breakeven Point

• The point where total revenue equals total costs; the business is neither profitable nor incurring a loss.

Fixed Cost

• Costs remaining constant, regardless of production levels, like rent, salaries, and insurance.

Retail Cost

• The price a product or service is sold to customers.

• Includes all expenses for producing or purchasing a product, including direct and indirect costs.

Markup

• A fixed percentage added to the cost to achieve profit.

Product Cost

• The total cost of making and preparing a product for sale, including direct materials, direct labor, and manufacturing overhead.

Factors Affecting Product Cost

• Direct Materials: Raw materials for manufacturing (e.g., wood, metal).

• Direct Labor Costs: Wages, taxes, benefits, and insurance for employees directly involved in production.

• Indirect Material Costs: Manufacturing overhead not directly traceable to the final product, for instance, machinery or materials.

• Indirect Labor Costs: Manufacturing overhead involving employees not directly involved in production, but still crucial.

Supply Costs

• Retailer's material costs, expenses tied to purchasing products from vendors.

Overhead Costs

• Expenses directly involved in selling merchandise.

Alternative Pricing Methods

• Value-Based Pricing: Customer-centric pricing that sets prices based on perceived value.

• Penetration Pricing: Low initial prices to quickly gain market share and encourage purchases.

Owner's Equity (or Capital)

• Residual interest of owners in company assets after liabilities are settled.

Sole Proprietorship

• Business where owner's equity is the same as the owner's liability.

Partnerships

• Business where partners' equity is the same as the owner's liability.

Corporations

• Business where stockholders' equity is the same as the owner's liability.

Revenues

• Economic benefits received from business activities.

Expenses

• Costs incurred in conducting business.

Income Statement

• Details company revenues and expenses to calculate profit or loss.

Profit

• Financial gain when revenues exceed expenses within a specific period.

Loss

• Negative result when expenses surpass revenues.

Sales

• Total income from selling goods to customers.

Rent Expense

• Costs of leasing office space, buildings, or equipment.

Utilities Expense

• Costs of utilities (telecommunications, gas, water, etc.).

Accounts Receivable

• Money owed to a company by customers.

Accounts Payable

• Amounts owed by a company to suppliers.

Land

• Long-term asset representing the value of land owned by a business.

Building

• Physical structure owned by a business.

Prepaid Expense

• Payments made in advance for future goods or services.

Inventory

• Goods held for resale or production.

Capital

• Funds or resources for business operations, growth, and investment.

Cash

• Money available for immediate expenses or investments.

Cost of Goods Sold (COGS)

• Direct costs of producing goods that are sold.

Expense Account

• Record of all costs not directly tied to production.

Operating Expenses

• Costs for maintaining daily business operations.

General and Administrative Expenses (G&A Expenses)

• Expenditures required to administer a business.

Operating Profit (EBIT)

• Measures business core profitability, excluding interest and taxes.

Earnings Before Taxes (EBT)

• Income before deducting taxes.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

• Measures company operating performance.

Depreciation

• Decrease in asset value over time.

Amortization

• Gradual reduction of debt through regular payments.

Earnings Per Share (EPS)

• Measures profitability by calculating earnings available to each shareholder.

Net Income (Net Profit or Net Earnings)

• Revenue after deducting costs, expenses, taxes, interest, and dividends.

Retained Earnings

• Accumulated profits not distributed as dividends.

GAAP - Generally Accepted Accounting Principles

• Generally accepted accounting rules and standards.

Operating Activities (cash flow)

• Cash flow activities related to producing or selling goods or services.

Investing Activities (cash flow)

• Cash flow activities related to investments in assets.

Financing Activities (cash flow)

• Cash flow activities related to company and creditor transactions.

Single-Step Income Statement

• Simplified income statement consolidating revenues, gains, expenses, and losses.

Multi-Step Income Statement

• Detailed income statement separating operational from non-operational revenues and expenses.

Horizontal Format (Financial Statement)

• Financial statement that compares the same line items across multiple accounting periods.

Vertical Format (Financial Statement)

• Financial statement that expresses each line item as a percentage of total revenue.

Balance Sheet

• Snapshot of financial position (assets, liabilities, and equity) at a specific time.

Capital Stock

• Initial investment made by company owners.