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Marketing Basics - Kotler Philip

Cost estimate

Demand, as a rule, determines the maximum price that a company can ask for its goods. Well, the minimum price is determined by the costs of the company. The company seeks to set a price on the product so that it fully covers all costs of its production, distribution and marketing, including a fair rate of return for the efforts and risks involved.

Cost types

The costs of the company are of two types - fixed and variable. Fixed costs (also known as “overhead costs”) are costs that remain unchanged. So, the company must pay monthly rent, heat supply, pay interest, salaries to employees, etc. Fixed costs are always present, regardless of the level of production.

Variable costs vary in direct proportion to the level of production. Each handheld calculator manufactured by Texas Instruments incurs the costs of acquiring plastics, conductors, packaging, etc. Per unit of output, these costs usually remain unchanged. And they are called variables because their total amount varies depending on the number of units produced.

Gross costs are the sum of fixed and variable costs at each particular level of production. Management seeks to charge a price for a product that at least covers all gross production costs.