Unit Price

Unit Price Meaning

The unit price is a measurement used to represent the price of a particular good or service to be exchanged with customers or consumers for money. The unit price refers to the price per unit of measures, such as price per pound, quart, ounce, or other units of weight or volume of the food package. 

The unit price is important for both customers and organizations. An organization cannot sustain itself for a long period by selling products at a lower price. Similarly, customers would not buy the product if the value of the product is less than the price. The researcher suggests that unit price information helps shoppers to save around 17-18% in supermarkets when they are educated on how to use it. 

Hence, customers should calculate the unit price to know what he is paying for a single item or a pound of food in supermarkets, rather than looking at the total quantity of the product he is purchasing.

Unit Price Formula 

The unit price includes fixed cost, the variable cost, overheads, direct labor cost, and a margin of profit to encourage the business activities and organization earning. Hence, the unit price formula is derived as:

Unit Price = Unit Cost + Profit Margin

Let's now understand what unit cost is.

Electricity Unit Price 

Electricity unit price is the price that you pay to consume one unit of electricity in your household. Electricity unit price varies depending on the number of reasons such as your location, your preferred mode of payment, and what traffic you have chosen. If the tariff you have chosen does not have standing charges( fixed amount you have to pay regardless how much electricity you have consumed), then your electricity unit price will be higher to compensate. 

Unit Cost

The unit cost or cost per unit is referred to as the price spent by the company to produce, store, and sell each unit of a particular product. The unit cost includes all the variable costs and fixed costs involved during production. Unit cost is the minimum cost incurred for buying any standard unit.

Unit Cost Formula

Unit cost formula, also referred to as the cost per unit formula is derived by adding all the fixed cost associated with the product that is the cost that does not change when the value of good and services produce changes and all the variable cost associated with the product that is the cost that changes when the value of good or services produced changes and dividing the value by the total units produced during that period.

Accordingly, the unit cost formula is given as :

Cost Per Unit = \[\frac{\text{Total Fixed Cost+Total Variable Cost}}{\text{Total Number of Unit Produced}}\]

Variable Cost

Variable costs are the cost that varies as the number of goods or services varies. 

Variable Cost Formula

The total variable cost incurred to produce the product is calculated by using the following formula:

Total Variable Cost - Total Number of Units Produced Variable Cost Per Unit

Variable Cost Per Unit

Variable cost per unit is defined as the cost of production of each unit produced in the company. Variable cost changes as the output or the level of the activity changes in the organization and these are not the fixed cost of the company as these costs occur only if there is a production in the company.

Variable Cost per Unit = \[\frac{\text{Total Variable Cost}}{\text{Total Number Unit Made}}\]

Fixed Cost 

Fixed cost is defined as the cost or expense that is not affected by the increase or decrease in the number of units produced or sold by the company over a short-term horizon. In other words, fixed cost is not affected by the business activities, rather it is related to the period.

Although total fixed cost remains the same within the relevant changes, the fixed cost per unit decreases as the production increases because the same amount of fixed cost is spread over a large number of units of output.

Fixed Cost per unit of a product can be calculated by using the following formula:

Fixed Cost per Unit =  \[\frac{\text{Total Fixed Cost}}{\text{Total Number Unit Made}}\]

What is Unit Elastic?

In Economics, unit elasticity is a term that describes the situation in which change in one variable is an equally proportional change in another variable. The unit elasticity in economic theory is frequently used to describe the change in demand or supply curves that are perfectly responsive to changes in price. A curve with an elasticity 1 is termed as unit elasticity. 

Unit Elastic Demand 

In economics, the elasticity demand describes the relationship between the number of products sold and the price of the product ( along with other factors). It is generally seen that customers react when the price of the product changes. If the price of the product increases, the demand decreases and vice versa.

Unit elasticity demand is similar to the elasticity demand in which change in price leads to equally proportional changes in quantity demand. In other words, unit elasticity demand states that the percentage change in quantity demanded is exactly the same as the percentage change in price. This generally happens where consumers have substitute goods available in the market to meet their needs. 

This concept also applies to the unit elasticity supply because when the supplier has substitute products to produce goods, the percentage change in price leads to equally proportional changes in quantity supplied.

As the percentage change in price leads to equally proportional changes in quantity demand and quantity supplied, the unit elasticity of demand is equal to -1 and the unit elasticity of supply is equal to 1..

Solved Examples

1. XYZ Company has a Total Variable cost of $ 60000 and total Fixed Cost of $ 40000 in February, which it incurred while producing $ 20000 Gadgets. Calculate Cost per unit of the Gadget produced by the Company.

Solution: The cost per unit of gadgets can be calculated by using the following cost per unit formula: 

Cost Per Unit Formula = \[\frac{\text{Total Fixed Cost+Total Variable Cost}}{\text{Total Number of Unit Produced}}\]

= \[\frac{\text{40000+60000}}{\text{20000}}\]


= $5 per unit

Therefore, the cost per unit of the gadget is $ 5

2. A certain product is made by the ABC incorporation. The Product has the following expenses and the Company wants to earn a profit of 20% over the Cost of the Production. Find price per unit of the Product.

Particular

Amount

Raw Material

100

Direct Labour

500

Overhead Expenses

300

Total Unit Produced

100

Profit Margin

20%


Solution: Following are the steps to calculate the price per unit of the product.

Step 1 : Calculate the total cost of the product. To calculate the total cost, we need to add all the expenses incurred to make the product ready for sale.

Accordingly,

Total Cost -  Raw Material + Direct Labor + Overhead Expenses

                          =  1000 + 500 + 300

                          =  1800

So, total cost of the product = $ 1800

Step 2 : Calculate the unit cost of the product 

Unit Cost Formula = \[\frac{\text{Total Cost}}{\text{Total Number of Unit Produced}}\]

= \[\frac{\text{1800}}{\text{100}}\]

  = $18 per unit

Step 3: Calculate the profit requirement of the product 

Profit Requirement =  Total cost per unit Profit Margin

             =   $18 x 20%

              = $3.6

Step 4 : Calculate the price per unit of the product 

Price Per Unit =   Cost Per Unit +  Profit Requirement

= $18 + $3.6

= $ 21.6

So, the price per unit of the product is $ 21.6

FAQs (Frequently Asked Questions)

1. How do unit Cost and Unit Price differ?

Unit cost is significant for the manufacturer as it calculates the amount spent to produce a single product whereas the unit price is significant for the customers as it calculates the per-unit price that the company charges from its customers against the goods or service sold. Hence, customers should compute the unit price to know what is paying for a single item rather than looking at the total quantity of product he is purchasing.

2. What are the Factors that affect the Elasticity of demand?

The factors that affects the elasticity of demands are Nature of the Product, Availability of Substitutes of Goods or Services, Income level of Consumers, Price level of Product or Services, and Consumers Habit.

3. What is the importance of Unit Cost?

The unit cost is also referred to as single costing. Unit cost is followed by the industries, which produce a single product on large scale continuously. For example, paper, cement, coal, etc. The unit cost is an important costing method through which cost per unit formula is derived. The cost per unit formula is derived by dividing the total cost of the product by the number of units manufactured during a given period of time. It is a good indicator for the organization to determine the productivity and efficiency of business. 

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