269 Section 10.2 Price Copyright Goodheart-Willcox Co., Inc. Next, add the markup, which is the desired amount of profit added, to determine the final price. It is important to accurately estimate the profit needed based on product costs. The following equation expresses cost-based pricing. cost + markup = selling price In the previous example, the cost for computer tablets is $140 each. Suppose based on the other costs associated with buying and selling these tablets, you must make $156 in profit on each tablet. This form of markup is called dollar markup because it is expressed as a dollar amount, not a percentage. What would be the selling price? cost + dollar markup = selling price $140 + $156 = selling price $296 = selling price Some businesses prefer to use a percentage markup to determine selling prices. They establish a percent of profit necessary for each item and add that amount to the cost to determine the selling price. For example, your business model may state that you must make a 40 percent profit on all sales. Using a 40-percent-markup scenario, the $140 tablet computer would have to be priced at $196. (cost × markup percent) + cost = selling price ($140 × 40 percent) + $140 = $56 + $140 = $196 = Some businesses use keystone pricing. Keystone pricing is doubling the total cost of a product to determine its selling price. For example, under keystone pricing, the $140 tablet would be priced at $280 ($140 × 2). Most businesses use a percentage markup rather than a dollar markup to determine the selling price. Focus on Finance Focus on Finance Rule of 72 If you plan to open a business, it is never too early to start getting your personal finances in order. Set a monthly savings goal and stick to it. Another tool is the Rule of 72. The Rule of 72 is a simple way to determine how long it will take you to double your money. Simply divide 72 by the interest rate you will earn. For example, perhaps you will need $10,000 to open your business. You have $5,000 now. How long would it take to double your $5,000 if you invest it at a 4 percent interest rate? The answer would be 13 years (72 ÷ 4 = 13).