COST PRICE IS SIMPLY THE TOTAL AMOUNT OF MONEY A MANUFACTURER WILL SPEND TO PRODUCE A PRODUCT OR SERVICE.
It is the total sum of outlays that are necessary to produce something, this will include materials, power, wages, rent or other property costs and even the costs associated with research and development.
How it comes to play
Consider a multinational company like Pepsi or Apple. They have customers across the world and for them, delivering their products directly to each customer is virtually impossible. So they have to work with distributors such as retailers like Walmart or your neighborhood supermarkets. Now, a company like Pepsi would first take account of its cost price – the total amount of money it paid to make a bottle of Pepsi. It will then create a “wholesale price” – which is the price it will charge the distributors to earn a profit.
Wholesale price is what we call the cost at which distributors will pay to get the product from the manufacturers. Once the distributors have the product, they will sell it at a retail price where they will be able to earn a profit as well.
Let’s look at this again but with numbers now.
Sam is a doll manufacturer and he spends $10 on every doll that he produces. Now in his case, $10 is the cost price. Sam wants to make sure his customers can easily buy his dolls so he will sell them in bulk to the nearest toy shop, Jane’s Toys at $12. This is the wholesale price that Jane will pay Sam for each doll that she buys from him. Now Jane like Sam wants to earn a profit. So when she sells them, she will charge her customers $15, which is the retail price. So in this case, Jane is getting a profit of $3:
Retail price Wholesale price Profit per doll
$15 $12 $3
For Sam, the profit was $2 :
Wholesale price Cost price Profit per doll
$12 $10 $2
This should clear the difference between wholesale and retail price, as wholesale price is for distributors that buy products in bulk. Sam would sell Jane 100 dolls in single transaction which would be more profitable to him. He doesn’t has to sell 100 dolls to 100 girls but only to one retailer. This economies of scale results in producers opting for selling to retailers/distributors at wholesale price which is less than what the producers themselves can get if they directly market and sell to their customers. For instance, Sam could earn $5 profit if he sells the dolls himself at $15 but he would have to product and package each doll every time he finds a customer which would increase his cost of production in the end, thereby shrinking his profits.