Fixed Cost per Unit
Fixed cost per unit is calculated by dividing the total fixed costs of business by the number of units.
A business has 86 per unit in variable costs and 120,000 per year in fixed costs. The business operates at a markup of 40%. What is the selling price when demand and production is 1,000 units and 3,000 units.
Fixed Cost per Unit at 1,000 units
The fixed costs are 120,000 and the fixed cost / unit = 120,000 / 1,000 = 120 per unit.
The total cost of a unit at this level of activity is 86 + 120 = 206.
Operating at a markup on cost of 40% the selling price would need to be 206 x 140% = 288.40
Fixed Cost per Unit at 3,000 units
The fixed costs remain at 120,000 and the fixed cost / unit = 120,000 / 3,000 = 40 per unit.
The total cost of a unit at this level of activity is 86 + 40 = 126.
Operating at a markup on cost of 40% the selling price would need to be 126 x 140% = 176.40
This example demonstrates the importance of fixed costs and the economies of scale achieved with higher levels of production
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.