How do we determine selling or retail price?

Question

I know that cost price is calculated keeping in view the following three factors:
1. Direct Material
2. Direct Labour
3. Overheads
Now what is the method to determine retail price of a commodity. Is there a certain formula to calculate the price?
Please explain in detail.

Answer 1

It depends on the market. There are several factors to consider like demand for the product, substitutes for the product, replacements for the product, and whether it is a luxury or normal good. If you want just a general equation, here you go:

(Direct material cost + Direct Labor Cost) x Overhead Factor = Total Cost

Total Cost x Profit Ratio = Total Selling Price

I hope this helps but it really is very general and depends on the product.

Answer 2

No formula that I'm aware of. Market forces determine sales prices. Basically, you charge what you can get away with (what the market will bear), and if your product doesn't sell, you cut the price. Supply and demand plays a large role, as does knowing your specific market (in today's biz-speak, called 'market positioning'). Downward price pressure, caused by too much product and not enough buyers, is what forces business to cut costs.

I suppose there's a formula for determining an acceptable mark-up price from cost, or profit margin, but if the buyers aren't buying at that price, that formula doesn't mean much.

Answer 3

It really depends on the product and the marketplace.

However most commodity type items, have fairly standard markups. Clothing, food, alcohol etc all have standard markups.

You should do some research on similar type products. If you are selling to retailers, they are more than willing to give you feedback on what standard markups are.