Cost price is the total amount of money that it costs a manufacturer to produce a given product or provide a given service.
A cost price includes all outlays that are required for production, including property costs, materials, power, research and development, testing, worker wages and anything else that must be paid for. The manufacturer must calculate a product’s cost price carefully to avoid taking a loss on sales or not being profitable enough. Scrupulous accounting and careful deliberations are required to set subsequent prices realistically. A sum for contingency may also be included in the cost price, given the difficulty of ensuring that all costs are accounted for.
Cost price, along with the profit margin, determines a product’s wholesale price. Between the manufacturer’s suggested retail price (MSRP) and the wholesale price, there is generally room for profit for both distributors and retailers. However, manufacturers occasionally offer a product at cost or even below cost – forgoing their profit – as a special incentive or a means of dealing with unforeseen circumstances, such as unfavorable market environments.
Cost price is often considered sensitive information that the manufacturer wants to protect from both customers and competitors.