Per Unit Cost of Production Formula

Per Unit Cost of Production Formula

The cost per unit production refers to the cost incurred by the company to produce one unit of a product. The total cost of production is the total variable and invariable costs required to produce a specific product. It determines the relationship between production cost, logistics cost, and gross profits. 

Significance of Per Unit Cost of Production Formula

Per unit cost of production determines the connection between production costs, logistics costs, and gross profit. Here are some of the benefits of calculating per unit cost of production:

  • It can determine the manufacturing and supplier cost
  • It is also used in marketing and sales
  • It can also evaluate fulfillment and shipping cost
  • It helps you correctly price your SKUs
  • The unit product cost formula can also calculate warehousing and storage costs

Applications of Per Unit Cost of Production Formula

  • Using the per-unit cost of production formula, e-commerce businesses can get insight into factors that are driving up their cost and reducing profits 
  • After knowing per unit cost, companies can determine product price to offset any potential losses or increase their profits 

Per Unit Cost of Production Formula

The simple per-unit cost of production formula is–

Cost per unit  =

(Fixed Costs + Variable Costs)

Number of Units Produced

Before we dive into using the formula, it is essential to understand the fixed and variable costs involved in the unit product cost formula. 

TOTAL FIXED COST

It is the cost that remains constant throughout the production process. For example, employee wages, rent of office space, and so on. The formula to calculate total fixed costs is-

Total fixed cost =

Building rent + Direct labor costs + Other fixed costs

TOTAL VARIABLE COST

This cost changes with time. The number of units sold within a specific time duration can also impact the value of variable costs. For example, customer acquisition, packaging, delivery, handling, shipping, etc., are some variable costs. 

Understanding with the help of an example

Suppose you make 5,000 pens a month. The fixed costs of the production would be your manufacturing space, electricity service, space lease, equipment cost, and other fixed costs. Your fixed cost comes out to be approximately S$400. 

The variable cost includes different materials required, certain items to decorate your pens, the hourly wage of workers, boxes, packaging, shipping, and many other costs along similar lines. It comes out to be S$4000 in a month. 

Adding the total costs would be fixed + variable = S$4400. Divide this by 5000 pens produced in the specific time period. You’ll get S$0.88 of cost per unit of production. 

It is always important to mention the time duration because the variable cost and the units produced could vary each month depending on the demand. 

What You Can Infer From the Formula

Per unit cost of production helps you with your inventory and SKUs. It also allows you to identify all the costs associated with producing one unit of your e-commerce product. The formula is a key indicator to assess whether the pricing strategy can set you for profit or loss. 

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