Unit of sale and unit cost

The essentials

The unit of sale is the standard quantity in which a product or service is sold to customers, for example one loaf of bread, one kilogram of rice, one hour of tuition, one plate of food or one night's stay in a hotel. Choosing a clear unit of sale makes pricing, costing and record-keeping easier.

• Unit price = the selling price of one unit of sale.
• Unit cost = total cost of producing or providing the units ÷ number of units.
• Profit per unit = unit price − unit cost.

Total cost includes both variable costs (which change with output, such as raw materials and packing) and fixed costs (which do not change with output in the short run, such as rent and salaries). For costing, a fair share of fixed costs is allocated to each product.

Key points

• Multiple products: when a firm sells several products, compute the unit cost of each separately, allocating shared costs on a reasonable basis.
• The average cost per unit across products is a weighted average: total cost of all products ÷ total units of all products, not a simple average of the unit costs.
• Mark-up on cost = profit per unit ÷ unit cost × 100; margin on sales = profit per unit ÷ unit price × 100.
• For services, the unit of sale may be time (per hour), distance (per km) or per job.

Exam tips

• Read whether the question asks for profit as a percentage of cost or of selling price.
• For multiple products, always weight by quantity.

Common mistakes

• Ignoring the allocated share of fixed costs while calculating unit cost.
• Taking a simple average of unit costs when quantities differ.