Cost, profit and selling price

Profit and loss are the terms used to identify whether a deal is profitable or not. We use these terms very often in our daily lives. If the selling price is greater than the cost price, then the difference between the selling price and cost price is called profit. If the selling price is less than the cost price, then the difference between the cost price and the selling price is called loss. The price at which a product is purchased is called its cost price. The price at which a product is sold is called its selling price. Let us learn more about profit and loss in this article.

Profit and Loss Related Terms

When a person buys an article for a certain price and then sells it for a different price, he makes a profit or incurs a loss. There are various terms that are associated with the entire process of making a transaction. For example, cost price of the article (C.P.), selling price (S.P.), discount, marked price, profit, and loss. Let us understand the meaning of these terms one by one.

Cost Price

The price at which an article is purchased is called its cost price. For example, if Neil bought an umbrella for Rs. 8, this is the cost price of the umbrella. It is abbreviated as C.P.

Selling Price

The price at which an article is sold is known as the selling price of the article. For example, if Neil sold the same umbrella for Rs. 10, then Rs. 10 is considered the selling price of the umbrella. It is abbreviated as S.P.

Profit

When, in a transaction, the selling price is greater than the cost price, it means we earn a profit. Using the above example, the profit that Neil earned is Rs. 2. It is calculated with the help of the formula: Profit = Selling price – Cost price. In the above example, the Cost price of the umbrella was Rs. 8 and the Selling price of the umbrella was Rs. 10, so the profit that he made can be calculated by using the formula:

Profit = Selling price – Cost price. Substituting the values, we get, Profit = 10 – 8 = 2. Therefore, he makes a profit of Rs. 2.

Loss

When, in a transaction, the cost price is greater than the selling price, it means we incur a loss. For example, if a bag is bought for Rs. 20 and it is sold for Rs. 17, it means we incurred a loss of Rs. 3 in this transaction. Loss is calculated with the help of the formula:

Loss = Cost price – Selling price.

Taking the same example, the Cost price of the bag is Rs. 20 and the Selling price is Rs. 17, so the loss can be calculated with the formula:

Loss = Cost price – Selling price.

Substituting the values, we get, Loss = 20 – 17 = 3. Therefore, there is a loss of Rs. 3 in the transaction.

Marked Price

Marked price is the price set by the seller on the label of the article. It is a price at which the seller offers a discount. After the discount is applied on the Marked price, it is sold at a reduced price known as the selling price.

Example: Sandra goes shopping at a store where everything is at a 50% discount. The price tag on a dress is Rs. 120. This means that the Marked Price of the dress before discount = Rs. 120.

Discount

To cope with the competition in business and boost the sale of goods, shopkeepers offer discounts to customers. The rebate or the offer given by the shopkeepers to lure the customers is called a discount. Discount is always calculated on the Marked price of the article.

Discount = Marked Price – Selling Price

Discount (%) = (Discount/Marked Price) × 100

If the marked price of an article is Rs. 600, and there is a 40% discount on it, this means that the customer can buy the article at the following price:

40% discount on marked price = (40/100) × 600

Discount ($ )= 24000/100 = Rs. 240

Therefore, Selling Price = Marked Price – Discount ($) = Rs. 600 − Rs. 240 = Rs. 360

Profit and Loss Formulas

Now, let us learn the formulas for calculating profit and loss.

Profit Formula

If the selling price of an article is greater than its cost price, there is a gain in the transaction. The basic formula used for calculating the profit is:

Profit = Selling Price – Cost Price.

Loss Formula

If the selling price of an article is lesser than the cost price, there is a loss in the transaction. The basic formula used for calculating the loss is: Loss = Cost Price – Selling Price

Illustration

To calculate the selling price on this basis, the food costs have to be expressed as a percentage of the selling price using the following calculation. Food cost ÷ Food cost as a % of the selling price × 100

For example, if food costs for a dish come to £4.50 and the gross profit target is 75%, the food cost as a percentage of the targeted sale is 25%.