Fixed cost per unit is calculated by dividing the total fixed costs of business by the number of units.

## Fixed Cost per Unit Example

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 cost per unit is calculated as follows.

Fixed costs = 120,000 Units = 1,000 Fixed cost per unit = Fixed costs / Units Fixed cost per unit = 120,000 / 1,000 = 120 per unit

The unit cost at this level of activity is calculated as follows.

Unit cost = Variable cost + Fixed cost Unit cost = 86 + 120 = 206

The selling price can now be calculated.

Selling price = Cost x (1 + Markup) Selling price = 206 x (1 + 40%) = 288.40

### Fixed Cost per Unit at 3,000 units

The fixed cost per unit is calculated as follows.

Fixed costs = 120,000 Units = 3,000 Fixed cost per unit = Fixed costs / Units Fixed cost per unit = 120,000 / 3,000 = 40 per unit

The unit cost at this level of activity is calculated as follows.

Unit cost = Variable cost + Fixed cost Unit cost = 86 + 40 = 126

The selling price can now be calculated.

Selling price = Cost x (1 + Markup) Selling price = 126 x (1 + 40%) = 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 and has built financial models for 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 degree from Loughborough University.