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.
A unit price is an amount at which a product or service could be exchanged between the producer, manufacturer, or service provider to the customer or consumer of the goods or services. It is important for both organizations and consumers. An organization could not sustain selling at lower prices over a consistent period and similarly, the customers would not purchase the product if the value perceived is lower than the price charged.
Unit Price Formula
The terminology to understand the formula as mentioned earlier is as follows:
#1 – Unit Cost
The unit cost 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 costs 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. The variable cost derived mainly in three heads; raw material, labor, and overhead costs. These are directly related to the products manufactured.
#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 products, 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.
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 = 1000+500+300 = $1800
Calculate Total Cost per Unit
- Cost per Unit = 1800 / 100 = 18 per unit.
Calculate Profit Requirement
- Profit Requirement = $18*20% = $3.6
Calculate Price per Unit
- Price per Unit = 18+3.6 = 21.6
So, the price per unit of the product is $21.6.
The unit price helps the company to adequately market its product. Following are some key advantages of pricing a product:
- To enter a new market, various marketing techniques such as low-cost pricing, or predatory pricing are concerned. To use 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 fairly 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.
Overall, the price of a product is an important 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. To achieve that, the company should be in a position to adequately price its product by including all the expenses and a profit margin to sustain the organization for the future too.
This 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 –