What is Unit Cost?
Unit cost is a measure of a company's cost to build or create one unit of product.
How Does Unit Cost Work?
For example, let's assume that it costs Company XYZ $10,000 to purchase 5,000 widgets that it will resell in its retail outlets. Company XYZ's unit cost is:
$10,000 / 5,000 = $2 per unit
Often, calculating unit cost isn't so simple, especially in manufacturing situations. Usually, unit costs involve variable costs (costs that vary with the number of units made) and fixed costs (costs that don't vary with the number of units made).
For example, at XYZ Restaurant, which sells only pepperoni pizza, the variable expenses per pizza might be:
Flour: $0.50
Yeast: $0.05
Water: $0.01
Cheese: $3.00
Pepperoni: $2.00
Total: $5.56 per pizza
Its fixed expenses per month might be:
Labor: $1,500
Rent: $3,000
Insurance: $200
Advertising: $500
Utilities: $450
Total: $5,650
If company XYZ sells 10,000 pizzas, then its unit cost would be:
Unit Cost = $5.56 + ($5,650 / 10,000) = $6.125
Why Does Unit Cost Matter?
Knowing unit cost helps business owners determine when they'll begin to turn a profit and helps them price their products with that in mind. It provides a dynamic overview of the relationships among revenues, costs, and profits.
However, typical variable and fixed costs differ widely among industries. This is why comparison of break-even points is generally most meaningful among companies within the same industry, and the definition of a 'high' or 'low' break-even point should be made within this context.
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