When selling a product, food and otherwise, you have to ensure sufficient earnings to cover your costs. Any income made beyond the production cost is considered profit. Before pricing your product, however, you must know certain basic terms:
Fixed costs (FC). Expenses that must be paid no matter how many goods or services are offered for sale. Fixed costs include are rent, utilities expenses, insurance, and Internet service.
Variable costs (VC). Expenses that change with the number of products offered for sale. Examples are raw materials, electricity to run machines, and cost of maintaining inventory. The more products you sell, the more raw materials you need.
Breakeven point. This is the point the number of products sold cover the total cost of production, represented by the formula: (VC x units sold) + FC = Price per unit x units sold. Let’s say your variable cost is P30, fixed cost P500, and price per unit is P50. Taking the formula above, your breakeven point would be 25. You would have to sell 25 units of the product in order to break even. Selling more than 25 units means that you earn a profit; sell less than 25 and you incur losses.
Marginal cost. The change in cost that results from changing the output by one unit. Basically, marginal cost is the difference in variable costs based on units sold. For example, your variable cost for 20 units is P30, and for 25 units, P37.50. Your marginal cost would then be P7.50 for 5 units, or P1.50 per unit.
Direct costs (DC). Expenses directly related to the production of a product, such as ingredients.
Indirect costs (IC). Expenses not directly related to the product, but have to do with overall production, like rent.