|Financial Management of a Small Handicraft Business (Oxfam, 1988, 43 p.)|
Consideration of market forces in price determination implies, first, that the business has access to such information, and, second, that there is a potential to raise prices to levels higher than the cost analysis would suggest. Both implications are often unrealistic for small handicrafts production units, who are therefore thrown back to costing as the basis of pricing.
From Figure 5, the total cost of the fibre mat was calculated to be 42.40, with small reductions on large volume production. To this, the production unit would add a modest profit margin to allow for accumulation of working capital and to cover contingencies. If we assume that to be 10%, the selling price of fibre mats would be:
· Per piece, 46.64 money units (probably rounded to
· Per 100 pcs, 45.32 money units (probably rounded to 45.25)
· Per 1000 pcs, 44.11 money units (probably rounded to 44.00)
This approach to pricing is called full cost pricing, or cost plus pricing, and it is the most commonly used method in the handicrafts industry, albeit often based on an inexact analysis of costs. It has two limitations. One is the lack of reference to market forces, as outlined. The other is the lack of distinction between fixed and variable costs.