Profit Planning and Decision

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Each Business should monitor the effect of its pricing strategy on the business ’s gross margin. Gross margin is the difference between the selling prices of a product or service and the amount the business had to pay for the raw materials that make up that product or service. A price reduction usually results in a reduction in gross margin. Increased sales volume can lead to a reduction in the average cost of goods sold because suppliers will often provide discounts to clients that buy in large volumes. A price increase that increases sales volume—or, at least, does not reduce sales volume—is a powerful tool for profit. Businesses that are able to raise prices without cost increases and without sacrificing sales volume possess are called pricing power.

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