Financial Management of a Small Handicraft Business (Oxfam, 1988, 43 p.): II. Pricing: II.2. Costs and pricing

Financial Management of a Small Handicraft Business (Oxfam, 1988, 43 p.)

Acknowledgements

Introduction

I. Cost calculations in the handicraft industry

(introduction...)

I. 1. Production costs

I.2. Overhead apportionment

I.3. Selling and distribution costs

I.4. Ways to reduce costs

II. Pricing

(introduction...)

II. 1. Value in the market

II.2. Costs and pricing

II.3. Contribution analysis

III. The concept of working capital

III.1. Defining working capital

III.2. The role of working capital

III.3. Performance measurement

III.4. Profits

IV. Financial planning and decision making

IV. 1. Management Accounting

IV.2. Planning for working capital requirements

IV.3. Releasing cash from other assets

IV.4. Working capital decisions

Conclusion

A manual of credit & savings for the poor of developing countries

II.2. Costs and pricing

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 46.50)
· 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.