Prime Cost
Candlefocus EditorBusinesses use prime cost calculations to assess the potential profitability of their products or services. This ensures that they are producing and selling products that will bring in a profit. On a micro level, prime cost can also be used to determine the lowest price a product can be sold for and still make a profit.
Many businesses make the mistake of not including indirect costs in their calculations and this can lead to inaccurate results. For example, the prime cost for a product may be small but the indirect costs may significantly increase the total production cost of a product. This can have a large impact on the profitability of a product and the selling price a business assigns to it.
Overall, prime cost plays an important role in helping businesses track and analyze their profitability. While it is just one factor of many to consider, it is an important one that has a direct effect on the bottom line of businesses. Furthermore, when used alongside other analyses, it can provide great insight into the overall operations of a business.