Entrepreneurship and Small Business (ESB) Certification Practice Exam

What is meant by the term 'cost price' in business?

1. The total amount of revenue earned from sales

2. The price at which a company sells its products

3. The amount it costs to produce or acquire a product or service

4. The markup added to the cost for profit

The correct answer is: The amount it costs to produce or acquire a product or service

The term 'cost price' in business refers specifically to the amount it costs to produce or acquire a product or service. This encompasses all expenses incurred during the creation of a product, such as materials, labor, and overhead costs. Understanding cost price is crucial for businesses because it forms the basis for pricing strategies and profit calculations. When businesses set prices for their products or services, they need to ensure that the selling price exceeds the cost price to achieve profitability. Hence, knowing the cost price helps in determining how much markup can be applied while remaining competitive in the market. In contrast, options discussing total revenue, selling price, or markup misidentify the purpose of the cost price. Total revenue focuses on income generated from sales rather than expenses incurred. The selling price is the final price at which a product is sold, which is influenced by the cost price but is distinctly different. The markup is the additional amount added to the cost price to cover expenses and profit, which also diverges from the definition of cost price itself. Understanding the accurate definition of cost price is fundamental for effective financial management and strategic planning in business.