Unraveling the Puzzle: How to Determine and Utilize Your Per Unit Costs in Business Planning

Hannah's Apothecary produces scented candles for an average of $16 per unit. It costs Hannah's biggest competitor $8 on average to create a similar candle. It costs Hannah $10 per unit.

While Hannah can mark up the price of her candles (charging customers more than her competitor), she knows she should identify ways to reduce her costs to have a healthier margin. 

For Hannah and many other retail businesses, success is heavily reliant on having a profitable cost per unit — and half of that battle is keeping your costs low. 

Only when you know how much it costs to produce or procure a single unit of any item or service can you make more informed decisions on how much to sell it for.

In this article, we will define cost per unit, explain why it is important, show how to calculate it, and offer actionable tips to reduce your cost per unit. 

What is cost per unit?

Cost per unit refers to both the variable costs and fixed costs associated with producing and delivering a single unit of any product or a single hour of service to an end consumer. Monitoring your cost of goods sold helps create context to set pricing and ensure profit is generated. You can calculate your cost per unit using the formula: (total fixed costs + total variable costs) / total units produced.

Cost per unit vs. price per unit

While the cost per unit refers to how much you spend to deliver one unit, the price per unit refers to how much you charge customers for each item sold. 

Below is how the relationship between these two metrics affects profitability:

• Break-even point is attained when cost per unit = price per unit

• Profit is secured when cost per unit < price per unit

• Loss is incurred when cost per unit > price per unit

To calculate the profit or loss per unit, you will need to find the difference between the cost and unit price.

Continuing with the Hannah's Candles example, here is how you arrive at the profit per unit, where:

• The cost per unit = $10 

• The price per unit = $16

How to calculate cost per unit?

Wondering how to calculate cost per unit? Fortunately, there’s a simple formula that is easy to use. You can use the calculator below for a simple calculation.

Cost per unit = (Total direct costs + Total overhead costs) / Total units produced

If you have gotten this far in my article and I've left you with the overwhelming feeling of "How do I know what those things are? How do I calculate them?" Having clean, balanced books is about 90% of the job. Book a session with us and we can go over how you can determine that or whether or not it's beneficial for you to hire our one of our team members to calculate this for you.