The conclusion we can draw from this is that there is no one profitmargin percentage that applies to all firms. Each firm sets its own target in the light of what is achievable in its own industry and circumstances.

The 10 per cent profit margin used in the estimating example may or may not be typical of the printing industry. We would have to look at the results of surveys carried out by their trade associations, or business monitoring organizations, to know what was the norm.

Drury (see Further reading) states that companies are often too simplistic in their approach to pricing models. The most successful, in his view, use cost-plus pricing, but in a flexible manner.

This does not necessarily mean that profit-seeking companies stick rigidly to prices determined by total costs. Companies use absorption costing as a long-term guide to what they need to sell at to earn a reasonable rate of return. In the short term, companies often trim their prices to suit market conditions. This can be disguised by the use of discounts as opposed to an overt price cut. This angle is explored more in the following chapter on marginal costing where the concept of contribution is introduced.

Some industries are dominated by just one or only a few large suppliers. Small firms in these industries may have to be price followers rather than price determiners, unless they can differentiate their products on service or quality grounds.

Taken From : Accounting for Non-Accountants