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Variable costs are those expenses that fluctuate with the level of production. These costs increase as more units are produced and decrease when fewer units are made. Some common examples include:

• Raw materials
• Direct labor costs
• Utility costs directly associated with production

These costs are directly tied to manufacturing, and calculating them per unit helps businesses understand how expenses change with varying production levels. Imagine you're a baker; if the price of flour goes up, your variable costs change directly with your flour usage per unit of product, like loaf of bread.
Understanding these costs helps businesses in pricing strategies to ensure they cover all expenses during periods of varying production.

Unlike variable costs, fixed costs are expenses that remain constant, regardless of production volume. Some examples of fixed costs are:

• Rent for facilities
• Insurance premiums
• Salaries of permanent staff

These costs don't change with the number of goods produced, meaning even if production halts, these expenses persist. Calculating fixed costs per unit involves dividing total fixed costs by the number of units produced. For clarity, picture an ice cream shop; regardless of how many cones you sell, rent continues each month.
Understanding and managing fixed costs is crucial in running a successful and sustainable business, as these costs need to be absorbed by the business's pricing strategy.

Markup percentage is the amount added to the total cost to determine the selling price, aiming to cover additional costs or earn a profit. It's expressed as a percentage of the total cost. For example, if you decide on a 20% markup, you're essentially charging 20% over the cost price.
Why use a markup percentage? It helps businesses ensure profitability by covering not just production costs but also unforeseen expenses or desired profit margins. To express it in formula, markup percentage is calculated by:

• Markup percentage = (Desired Profit + Additional Costs) / Total Cost

By determining a suitable markup percentage, businesses align their pricing with their financial goals and market conditions.

The selling price is determined by the formula:\[\text{Selling Price} = \text{Total Cost per Unit} \times (1 + \text{Markup Percentage})\]
This formula ensures that all costs and desired profit margins are incorporated, providing a clear pricing structure. For instance, after determining total costs amount to \(100 and applying a 20% markup, the selling price would be \)120 per unit.
Prices set through cost-plus pricing reflect deeper insights into costs and profit strategies, ensuring that businesses cover production expenses and earn a profit. It's a straightforward method to maintain financial health, as long as the markup percentage aligns with market competition and consumer expectations.