Unit Price

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.

Unit Price

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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:

#2 – Profit Margin

Apart from including the cost of sales 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.

You can download this Unit Price Excel Template here – Unit Price Excel Template

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.

Unit Price Example 1

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.

Unit Price Example 1.1

Total Cost = Raw Material Direct Labour + Other Overheads

  • Total Cost = 1000+500+300 = $1800

Calculate Total Cost per Unit

Example 1.2

Cost per Unit = Total Cost / Total Units

  • Cost per Unit = 1800 / 100 = 18 per unit.

Calculate Profit Requirement 

Unit Price Example 1.3

Profit Requirement = Total Cost per Unit * Profit Margin

  • Profit Requirement = $18*20% = $3.6

Calculate Price per Unit

Example 1.4

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:

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.

Recommended Articles

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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