Cost Price and Selling Price (Grade 11 NSC Matric Mathematical Literacy): Revision Notes
Cost Price and Selling Price
What is cost price?
Cost price refers to the total amount of money needed to make a product or provide a service. This includes all the expenses involved in creating what you want to sell.
Understanding cost price is crucial because it helps you determine the minimum amount you need to charge customers to cover your expenses. Without knowing your cost price, you cannot set appropriate selling prices or calculate potential profits.
Components of cost price
Cost price typically includes:
- Raw materials or ingredients
- Labour costs
- Utilities (electricity, water)
- Equipment rental or depreciation
- Other overhead expenses
Important exam tip: In basic calculations, you may only be given ingredient or material costs, but remember that real-world cost prices include additional expenses.
Calculating cost price step-by-step
When calculating cost price, you often need to work out the proportional cost of ingredients based on available shop sizes and your actual requirements.
Method for proportional cost calculation:
- Identify the quantity you need for your product
- Find the available shop size and price
- Calculate the cost per unit
- Multiply by the quantity needed
Formula:
Then:
Worked Example: Doughnut Cost Calculation
Let's examine how to calculate the cost price for making a batch of 24 doughnuts:
Step-by-step calculation for flour:
- Quantity needed: 960g
- Available in shops: 1kg (1000g) at R10,50
- Cost per gram: R10,50 ÷ 1000g = R0,0105 per gram
- Cost for 960g: R0,0105 × 960g = R10,08
The same method applies to all ingredients. Adding up all ingredient costs gives us R27,80 for the entire batch.
Cost per doughnut: R27,80 ÷ 24 doughnuts = R1,16 per doughnut
This R1,16 only covers ingredient costs. In practice, you would increase this to around R1,30 to account for electricity, water, labour, and other expenses not included in the basic calculation.
Understanding selling price
Selling price is the amount you charge customers when they buy your product or service. This is the price that appears on your price tags or invoices.
Key relationship
The selling price must always be higher than the cost price if you want to:
- Cover all your expenses
- Make a profit
- Avoid making losses
Formula:
The difference between selling price and cost price is your profit margin.
Setting the right selling price
Setting an appropriate selling price involves more than just adding a random amount to your cost price. You need to consider several important factors.
Market research
Market Research Considerations:
- Research what similar products sell for at other businesses
- Ensure your price is competitive
- Avoid pricing too high (customers won't buy) or too low (you'll make insufficient profit)
Worked Example: Doughnut Pricing Strategy
If your cost price per doughnut is R1,30 and market research shows:
- Other shops sell similar doughnuts for R5,00
- Customers expect doughnuts to cost around R4,00-R6,00
Appropriate selling prices might be:
- R5,00 (competitive with market)
- R4,50 (slightly below market average)
- R5,50 (premium pricing if quality is higher)
Poor pricing choices:
- R15,00 (too expensive - customers will go elsewhere)
- R2,00 (too low - barely covers costs, no profit)
Profit calculation
Profit per unit = Selling price - Cost price
If selling price = R5,00 and cost price = R1,30: Profit per doughnut = R5,00 - R1,30 = R3,70
Exam tips
When working with cost price and selling price calculations, keep these important points in mind:
Essential Exam Strategies:
- Always show your working when calculating proportional costs
- Remember to convert units correctly (grams to kilograms, millilitres to litres)
- Check that your selling price is higher than cost price
- Consider market factors when suggesting appropriate selling prices
- Round monetary answers to two decimal places (cents)
Key Points to Remember:
- Cost price includes all expenses needed to make a product or provide a service
- Use proportional calculations when working with different package sizes
- Selling price must exceed cost price to generate profit and avoid losses
- Research market prices before setting your selling price
- Basic cost calculations may only include materials - real costs include utilities, labour, and overheads