Cost of producing the product
Cost per unit
Cost per unit is the average cost of producing or selling one item. You find it by dividing a total cost by the number of units sold or produced in the same period. Businesses use it to work out the price they need to charge to cover their costs and make a profit.
The number of units must be for the same period as the costs, so a month of costs is divided by the units made in that month.
The three calculations
| Cost per unit | Calculation | Example: 800 packs |
|---|---|---|
| Total cost per unit | total costs ÷ number of units | £1000 ÷ 800 = £1.25 |
| Variable cost per unit | total variable costs ÷ number of units | £400 ÷ 800 = £0.50 |
| Fixed cost per unit | total fixed costs ÷ number of units | £600 ÷ 800 = £0.75 |
Meadow Melts makes wax melts. In one month its fixed costs are £600, its variable costs are £400 for 800 packs, so total costs are £1000. The two per-unit figures add up to the total cost per unit: £0.50 + £0.75 = £1.25.
Why fixed cost per unit falls
Total fixed costs do not change when output changes. The £600 of rent and insurance is paid whether the business makes 400 packs or 1200 packs, so the same £600 is shared between more units. At 400 packs the fixed cost per unit is £1.50, but at 1200 packs it drops to £0.50.
Variable cost per unit normally stays the same, because each pack uses about the same amount of wax and packaging. So as output rises, total cost per unit falls as well, even though the total costs themselves go up.
Practise this
Cambridge National Enterprise & Marketing · 3.1 Cost of producing the product
Cambridge National Enterprise & Marketing · 3.3 Profit/loss