Determining Prices Revision Notes for Grade 10 NSC Matric Accounting

Determining Prices

Introduction

When running a business, one of the most important decisions an entrepreneur must make is how to price their products or services. Setting the right price ensures that the business covers its costs and makes a profit. Understanding the relationship between cost price, mark-up, and selling price is essential for successful business management.

Selling price and cost of sales

Understanding cost price

The cost price is the amount a business owner pays when purchasing goods that will be resold to customers. This is the original purchase price paid to suppliers or the cost of producing an item.

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The cost price is also known as the cost of sales because it represents what the goods actually cost the business before they are sold.

What is mark-up?

To generate profit from selling goods, a business cannot simply sell items at the same price they were purchased. Instead, the entrepreneur must add an additional amount to the cost price. This extra amount is called the mark-up.

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The mark-up represents the profit the business will earn when the item is sold. Without adding a mark-up, the business would only break even and wouldn't be able to cover operating expenses or grow.

Calculating selling price

The selling price is the final amount that customers pay when they buy a product. It consists of two components:

The cost price (what the business paid)
The mark-up (the profit added)

Key formula:

$\text{Cost Price (CP)} + \text{Mark-Up (MU)} = \text{Selling Price (SP)}$

For manufactured items, costs are added at each stage of the production process, and the entrepreneur must carefully adjust the selling price to ensure profitability.

Working with percentage mark-ups

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When calculating prices using percentage mark-ups, there's an important principle to remember: the cost price is always treated as 100% for calculation purposes.

This means:

Cost Price (CP) = 100%
Selling Price (SP) = Cost Price (CP) + Mark-up (MU)

Finding the cost price

When you know the selling price and the mark-up percentage, you can calculate the cost price using:

$\text{CP} = \frac{\text{SP amount} \times 100\%}{100\% + \text{MU}\%}$

How it works: If the mark-up is 30%, the selling price represents 130% (100% + 30%). To find the original cost price (100%), you divide the selling price by 130% and multiply by 100%.

Finding the selling price

When you know the cost price and the mark-up percentage, you can calculate the selling price using:

$\text{SP} = \frac{\text{CP amount} \times (100\% + \text{MU}\%)}{100\%}$

How it works: Add the mark-up percentage to 100% to get the total percentage the selling price represents. Then multiply the cost price by this total percentage.

Worked examples

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Worked Example 1: Calculating Selling Price

A trader buys a shirt for R80 (cost price). She wants to add a 50% mark-up. What should the selling price be?

Solution:

CP = R80
MU% = 50%
$\text{SP} = \text{CP} \times (100\% + \text{MU}\%) \div 100\%$
$\text{SP} = \text{R80} \times (100\% + 50\%) \div 100\%$
$\text{SP} = \text{R80} \times 150\% \div 100\%$
$\text{SP} = \text{R80} \times 1.5$
SP = R120

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Worked Example 2: Calculating Cost Price

A business sells an item for R180 with a 20% mark-up. What was the cost price?

Solution:

SP = R180
MU% = 20%
$\text{CP} = \text{SP} \times 100\% \div (100\% + \text{MU}\%)$
$\text{CP} = \text{R180} \times 100\% \div (100\% + 20\%)$
$\text{CP} = \text{R180} \times 100\% \div 120\%$
$\text{CP} = \text{R180} \div 1.2$
CP = R150

Labour costs

Labour costs refer to the wages and salaries paid to employees or workers. These costs are an important part of determining the overall cost of producing goods or providing services. Labour costs can be categorised as either direct or indirect.

Direct labour

Direct labour refers to work that is directly involved in creating or producing the product being sold.

These are the workers whose hands physically make, assemble, or manufacture the items. Their labour can be directly traced to specific products.

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Example: If you run a business making beaded jewellery, the cost of paying the person who actually creates the beaded necklaces and bracelets is a direct labour cost. Similarly, in a bakery, the baker who mixes ingredients and bakes the bread represents direct labour.

Indirect labour

Indirect labour refers to work that supports the business but is not directly linked to producing the actual product.

These workers perform important tasks that help the business run smoothly, but they don't physically create the products being sold.

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Examples of indirect labour:

Wages paid to a cleaner who maintains the workspace
Salary for a salesperson who helps sell your beaded jewellery but doesn't make it
Payment to an accountant who manages the business's financial records
Security personnel who protect the business premises

The key difference is that indirect labour costs cannot be directly traced to a specific product, but they are still necessary for the business to operate effectively.

Income

Income represents the money that flows into the business from its operations. It is what the entrepreneur (business owner) earns through the business's activities.

There are different types of income:

Fee income: Money earned from providing services to customers (e.g., a hairdresser charges fees for haircuts)
Sales income: Money earned from selling goods to customers (e.g., a shop sells groceries)

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For example, if you run a tutoring service, the fees students pay you for lessons represent income. If you sell handmade crafts, the money customers pay when they purchase your items is sales income.

Expenses

Expenses are the costs that a business must pay to operate successfully. These are the amounts entrepreneurs spend to keep their businesses running day-to-day.

Common business expenses include:

Wages and salaries: Payment to employees
Telephone costs: Communication expenses
Water and electricity: Utility bills
Stationery: Paper, pens, and office supplies
Rent: Cost of business premises
Transport: Delivery or travel costs
Marketing: Advertising and promotion

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All these expenses must be carefully managed because they reduce the overall profit of the business. The income earned must be greater than the total expenses for the business to be profitable.

Exam tips

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Essential Exam Tips:

Always remember that cost price = 100% when working with percentage calculations
Write down the formula CP + MU = SP at the start of pricing questions
Be careful with percentages – convert them to decimals or use the percentage formula correctly
Show all your working in calculations, even if you use a calculator
Label your answers clearly with R for currency amounts
When classifying labour costs, ask yourself: "Does this person directly make the product?" If yes, it's direct labour; if no, it's indirect labour

Remember!

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Key Points to Remember:

Cost Price (CP) + Mark-Up (MU) = Selling Price (SP) – this is the fundamental pricing formula
Cost price is always 100% for calculation purposes when working with percentage mark-ups
Direct labour is directly involved in making the product, while indirect labour supports the business but doesn't directly produce goods
Income is money flowing into the business from sales or fees
Expenses are the costs paid to run the business, and they reduce overall profit
Proper pricing ensures that all costs (including direct labour, indirect labour, and expenses) are covered, and the business still makes a profit

Determining Prices (Grade 10 NSC Matric Accounting): Revision Notes