Setting Prices and Testing Profitability

Calculate costs and contribution, then check whether your price and sales capacity can support the business.

Part 6 of 10 | Starting a Small Business in The Gambia

Learning goals Calculate variable cost per sale, contribution and a simple break-even point. Your output is a pricing sheet that compares the financial result with customer evidence and delivery capacity.

Before you begin Allow 90 minutes. Bring your capacity estimate, research and startup budget. Use invented figures for practice. This is a management-planning model, not a tax calculation or a claim about prices in The Gambia. Obtain current costs and applicable tax guidance before setting real prices.

Identify costs without double counting A variable cost changes with the number of units sold, such as materials consumed for a job or a transaction charge on a sale. A fixed cost stays broadly unchanged within the period and capacity being considered, such as an agreed monthly workspace payment. Some costs contain both parts. Describe your assumptions so another person can follow the calculation.

For a service, include the time needed to inspect, prepare, deliver and correct work. Decide how you are treating the owner's labour. You might include a per-job labour allowance or a monthly target for the owner; do not count the same allowance twice. A calculation that ignores all owner time can make an exhausting activity look attractive when it provides no reasonable return.

Calculate contribution before profit Suppose Awa charges D150 for one defined simple alteration. Materials, a per-job labour allowance and other variable costs total D60. Contribution per job is D150 minus D60, or D90. Contribution is the amount left to cover fixed costs and then generate a surplus. It is not automatically the owner's spendable profit.

Assume monthly fixed operating costs are D1,800. At 30 jobs, revenue is D4,500 and variable costs are D1,800, leaving contribution of D2,700. Subtract fixed costs of D1,800 to get a D900 operating surplus in this simplified model. It excludes tax, finance costs, depreciation and other unmodelled items, so it must not be presented as a complete accounting profit figure.

Find the break even point Break-even units equal fixed costs divided by contribution per unit when the contribution is positive. Here, D1,800 divided by D90 equals 20 jobs for the month. At that volume the model covers the listed costs but leaves no additional surplus. If the result is a fraction, round up to a whole sale when units cannot be split.

If price is equal to or below variable cost, each sale contributes zero or less toward fixed costs and there is no useful positive break-even volume in this model. More sales would not solve that problem. Review scope, efficiency, cost or price. When you sell different products, calculate their individual contributions; this single-product formula cannot simply be applied to a mixed sales total.

Understand discounts and price language A D30 discount changes Awa's price from D150 to D120. If variable cost stays D60, contribution falls to D60. The new break-even point is 30 jobs, not 20. A modest-looking discount can require significantly more work. Check whether capacity and demand support that extra volume before offering it.

Markup and margin use different denominators. If an item costs D100 and sells for D125, markup on cost is 25 percent, while gross margin on sales is 20 percent. The calculations are 25 divided by 100 and 25 divided by 125. Use clear labels rather than calling both profit percentage. This arithmetic example says nothing about the appropriate price for a real product.

Compare the result with the market Cost calculations establish what the offer needs to earn, but customers decide whether the value fits their needs and alternatives. Compare the same scope and delivery terms using Part 2 evidence. If customers will not pay a sustainable price, change the offer or pause. A lower-cost format, a narrower task or a different customer group may be worth testing.

Compare required sales with delivery capacity for the same period. A profitable-looking plan that needs more jobs than you can complete is not workable. Write down the total customer price and included services clearly. Confirm the applicable tax treatment with GRA or a qualified adviser; do not label a charge VAT without establishing the right to charge it and the relevant rules.

Guided exercise 1. Define one sale unit and list its variable costs. Explain how owner time is treated. List the fixed costs for one month separately.

2. Calculate price minus variable cost, then monthly fixed costs divided by that contribution. Show the working and round up if necessary.

3. Calculate the simplified operating result at 10, 20 and 30 jobs using the case figures. Label the items excluded from the model.

4. Reduce the price by D30 and recalculate contribution and break-even volume. Compare the resulting workload with your Part 3 capacity.

5. Write a customer-facing price description stating the scope, exclusions and delivery terms. Explain whether you would retain, revise or stop the offer and why.

Knowledge check 1. What is contribution at price D150 and variable cost D60?

2. What is break-even volume at D1,800 fixed costs and D60 contribution?

3. What are the simplified monthly results at 10, 20 and 30 jobs at the original price?

Answer guide 1. D90 per job, before fixed costs and other excluded items.

2. Thirty jobs per month.

3. A D900 loss, zero surplus and a D900 surplus respectively. Each job contributes D90 and monthly fixed costs are D1,800.

Completion standard Complete the pricing sheet with correct units, period, contribution, break-even calculation and discount test. Identify excluded costs and compare the result with capacity and customer evidence. Answer all checks correctly. Carry the chosen price and cost categories into the records lesson.

Sources and verification notes

US Small Business Administration Plan your business. Checked 14 September 2026. General background for market research, startup costs and finance planning only. US programmes and legal rules do not apply to The Gambia; all course examples are independently constructed.