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An extended cost is a type of accounting process that involves multiplying the unit cost for an item by the total number of units purchased with a single order. Most calculations of this type also include any ancillary charges that are associated with the order, arriving at an average cost per unit. This is very helpful when it comes to understanding the total cost paid for each unit, especially when the aim is to resell those units to a client base.
One of the easiest ways to understand the process of an extended cost is to consider a local grocer who purchases produce from a farmer. The grocer determines to purchase a total of 100 baking potatoes from the farmer at a sale price of $0.50 per potato. If the farmer does not charge any type of handling or delivery fees for the order, this means that the extended cost for the order comes to $50 USD. Should the farmer charge a flat fee of $5 for the delivery of the potatoes, this means that the extended cost for the order is $55. As a result, the grocer has an investment of $0.55 in each potato and can set the retail price to cover the expense and allow for the generation of some amount of profit from each potato sold.
Calculating the extended cost is important when it comes to setting retail prices for any type of goods or services. Since the process takes into account both the unit price paid for each item as well as an ancillary expenses associated with the sale, the business is able to determine how much each unit must be sold for in order to break even. From there, the business can assess current market conditions and determine the sale price that is likely to attract favorable attention from consumers and make it possible to sell all the items in stock for at least some amount of profit.
While important to generating revenues, using this same basic formula is also helpful when it comes to projecting operational costs and profits for an upcoming tax period. Doing so makes it easier for the company to plan on remitting a certain amount of taxes to the appropriate agencies each accounting period, an approach that helps to prevent underpayment of taxes and the possible imposition of fines or penalties when the annual return is filed. Typically, many companies will evaluate the extended cost on a regular basis throughout the business year, making adjustments for taxes and sale prices when and as circumstances dictate.