Why knowing your per-unit costs is so important for product businesses
Updated: Feb 16
By breaking down your costs to the base (smallest) unit of production you can determine what it takes to make a profit on a selling 1 units of a product. You can then scale that up to make sure you always make a profit, no matter how many units are involved. It sounds simple, but it's true; if you make a profit on every sale it's easier to stay in business.
Cost per production unit or cost per sales unit?
Yes. To really understand your costs and profit structure you need to know both, but start with the cost per production unit. After you break down your input costs to the per production unit level you can add up the number of production units that go into a sales unit and then you know your cost for that sales unit. For example: If you sell donuts by the dozen, start with how much it costs to make 1 donut - that is your cost per production unit. Then multiply that by 12 to get your cost per dozen.
Cant I just raise prices so I don't have to figure this out?
Maybe, if you don't care about optimizing your profitability and efficiency, and you never take on investors, and you don't need a big loan anytime soon. The real question is why don't you want to know the fundamentals of what allows your business to make a profit. The math isn't difficult and you probably already know more of the inputs than you think. the