What is Unit Price?
Unit Price is a measurement used for indicating the price of particular goods or service to be exchanged with customers or consumers for money and it includes fixed costs, variable costs, overheads, direct labour and a margin of profit to sustain the business activities and earning of organisation.
Explanation
A unit price is an amount at which a product or service exchange between the producer, manufacturer, or service provider to the customer or consumer of the goods or services. It is vital for both organizations and consumers. An organization could not sustain selling at lower prices over a consistent period. Similarly, the customers would not purchase the product if the value perceived is lower than the price charged.
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For eg:
Source: Unit Price (wallstreetmojo.com)
Unit Price Formula
Unit Price Formula = Unit Cost + Profit Margin
The terminology to understand the formula as mentioned earlier is as follows:
#1 – Unit Cost
The unit costThe Unit CostUnit cost is the total cost (fixed and variable) incurred to produce, store and sell one unit of a product or service. It is calculated by adding fixed and variable expense and dividing it by the total number of units produced.read more indicates the cost of producing the final products at the point where it readily available to be sold or transferred. The cost of the product mainly consists of the following heads:
- Fixed Costs: Fixed costsFixed CostsFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more are the costs that remain static over the period until a range or level. If the level of production till which the fixed cost is static, it tends to increase. Fixed costs could be from various departments such as Production, distribution, Selling, and advertisement, etc. Few examples of the fixed costs could be Rent, Depreciation, fixed advertisement program, etc.
- Variable Costs: Variable costs tends to vary with the level of production and the number of units produced. These are fixed for the product and increase or decrease in line with the production of a unit. We divide the variable cost mainly in three heads; raw material, labor, and overhead costsOverhead CostsOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more. These are directly related to the products manufactured.
#2 – Profit Margin
Apart from including the cost of salesCost Of SalesThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read more or the total cost incurred to make the product available to sell, a profit portion is also added to arrive at the final price of the product or service. The profit portion is generally added to an extent a company sees its product that would create value for the consumers. It depends upon multiple factors such as the brand value of the product, selling strategies, competitive or substitute productsSubstitute ProductsAny alternative, replacement, or backup of a primary product in the market is referred to as a substitute product. It refers to any commodity or combination of goods that might be used in place of a more popular item in normal circumstances without affecting the composition, appearance, or utility.read more, etc.
Example of Unit Price
Let’s take an example.
Let’s take an example of a product made by XYX incorporation. The product has the following expenses, and the company wants to earn a profit of 20% over the cost of production. The total number of units produced is 100. Find out the total price of the product.
Solution
To arrive at the final price of the product, the following steps are required:
Calculate Total Cost of Product
To determine the total cost of the product, we need to add all the expenses incurred to make the product ready for sale or transfer.
Total Cost = Raw Material Direct Labour + Other Overheads
- Total Cost = 1000+500+300 = $1800
Calculate Total Cost per Unit
Cost per Unit = Total Cost / Total Units
- Cost per Unit = 1800 / 100 = 18 per unit.
Calculate Profit Requirement
Profit Requirement = Total Cost per Unit * Profit Margin
- Profit Requirement = $18*20% = $3.6
Calculate Price per Unit
Price per Unit = Cost per Unit + Profit Requirement
- Price per Unit = 18+3.6 = 21.6
So, the price per unit of the product is $21.6.
Advantages
The unit price helps the company to adequately market its product. Following are some critical advantages of pricing a product:
- To enter a new market, various marketing techniques such as low-cost pricing, or predatory pricingPredatory PricingPredatory pricing is a pricing strategy in which the prices of products and services are set at such a low level that it becomes nearly impossible for others to compete in the existing market and forces them to leave.read more are concerned. For using these strategies, the unit price of the product should be adequately derived prior so the company could understand its position on the pricing techniques.
- The customers or consumers see the value of the product concerning the price they are paying for it. If in the eyes or customer, the value of the product is lesser than the price charged, it is reasonably possible that the sale would not happen. So, to attract the customers, the price of the product needs to be set in such a way that it works for both parties; the company and the customers.
Conclusion
Overall, the price of a product is an essential measure for the company in various respects, such as deciding a new pricing strategy, attracting customers for the product, fighting competition, and creating the market for its products or services. For achieving that, the company should be in a position to adequately price its product by including all the expenses and a profit marginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more to sustain the organization for the future too.
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This article has been a guide to what is Unit Price and its definition. Here we discuss formula to calculate the price per unit along with an example and advantages. You may learn more about financing from the following articles –
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