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Jan112013

How to calculate cost per unit

The cost per unit is commonly derived when a company produces a large number of identical products. The cost is derived from the and fixed costs incurred by a production process, divided by the number of units produced.

Variable costs, such as direct materials, vary roughly in proportion to the number of units produced, though this cost should decline somewhat as unit volumes increase, due to greater purchasing discounts. Fixed costs, such as building rent, should remain unchanged no matter how many units are produced, though they can increase as the result of additional capacity being needed (known as a step cost, where the cost suddenly steps up to a higher level once a specific unit volume is reached). Examples of step costs are adding a new production facility or production equipment, adding a forklift, or adding a second or third shift. When a step cost is incurred, the total fixed cost will now incorporate the new step cost, which will increase the cost per unit. Depending on the size of the step cost increase, a manager may want to leave capacity where it is and instead outsource additional production, thereby avoiding the additional fixed cost. This is a prudent choice when the need for increased capacity is not clear.

Within these restrictions, then, the cost per unit calculation is:

(Total fixed costs + Total variable costs) / Total units produced

The cost per unit should decline as the number of units produced increases, primarily because the total fixed costs will be spread over a larger number of units (subject to the step costing issue noted above). Thus, the cost per unit is not constant.

For example, ABC Company has total variable costs of \$50,000 and total fixed costs of \$30,000 in May, which it incurred while producing 10,000 widgets. The cost per unit is:

(\$30,000 Fixed costs + \$50,000 variable costs) / 10,000 units = \$8 cost per unit

In the following month, ABC produces 5,000 units at a variable cost of \$25,000 and the same fixed cost of \$30,000. The cost per unit is:

(\$30,000 Fixed costs + \$25,000 variable costs) / 5,000 units = \$11/unit

Related Questions

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Is the fixed cost in these examples caculated in one month?
What if The manufacture produced more than one item?

June 2, 2012 | Mona

If the manufacturer produced more than one item, you need to apportion the fixed cost among all of the items produced, based on a common method of allocation, such as direct labor incurred, machine hours used, and/or square footage of floor space occupied.

June 3, 2012 | Steve Bragg

How do you calculate units sold, please can anyone assist.

July 1, 2012 | neo

We are running a "fake" sub shop in class.
We have a capacity of 9,000
Fixed Cost \$4,000
Vaiable cost per unit \$2.40. I am having trouble figuring out the following:
1. How much should I charge per sub
2. How many subs we are wanting to produce in a month
3. How much we should spend on advertising

My group has come up with:
Charging \$3.00 per sub sandwich
2,083 subs produced in a month