new business module

ESTIMATING INCOME, COST AND PROFIT 97
if the sales price of a product does not cover that product’s
direct costs.
The sales price should also cover the indirect costs and depreciation.
As soon as the sales price covers more than the direct
costs of the product, selling the product helps to cover the
indirect costs and depreciation, i.e. each product sold brings
in some money to cover the indirect costs and depreciation.
Increasing the sales volume of such products increases their
contribution to covering indirect costs and depreciation. If
sales can be increased sufficiently, the product might actually
have a positive profit margin.
Increasing the price of a product that is not covering its total
cost is also a possibility. However, entrepreneurs should not
forget that not only does the sales price directly affect the
product’s profit margin, it also influences demand for that
product, and therefore the volume of sales. In general, it can
be said that the higher the sales price, the lower the volume
of sales and vice versa. Consequently, the level at which the
sales price for a product is set has a considerable impact on
the profit generated.
Typically, small businesses produce products that are already
available on the market and there are limited possibilities for
product diversification. This means that in many cases the prevailing
market price for a product or service provides the upper
limit for setting the sales price. The lower limit is, of course,
given by the cost of producing the product or service.
Again, when setting a price, entrepreneurs have to consider
the total cost of the product, the customers’ willingness to pay,
and competitors’ prices.
Note: These profit-margin calculations may be too complicated
for some participants. If this is the case, trainers can simplify the
module by focusing on simple income, cost and profit calculations.
This will allow participants to see if their projects are financially
viable. Participants can perform the calculation with
different prices to see how this changes their profit. This is more