Unit Costs

Unit costs are a key indicator of the efficiency and productivity of a business. They are also critical to the profitability and competitiveness of many businesses.

What is the Unit Cost?

The unit cost measures the average cost per unit produced, as measured over a particular time period (e.g. month, year).

Unit costs will vary over time and as the scale of a business’ operation changes. Unit costs are particularly sensitive to the effect of significant operational scale and to the relationship between fixed and variable costs for a business.

How are Unit Costs Calculated?

The unit cost can be calculated using the following formula:

Looking at an example of this calculation, the table below illustrates how unit costs (cost per unit) change as output increases. In the data used, it is assumed that fixed costs are £10,000 and variable costs are £100 per unit:

Understanding how unit costs change as output changes – and over time – is very useful for a business.

So too is understanding how unit costs compare with the competition, since we know that unit costs are an important component of competitiveness.

In the table below, the unit costs of different businesses are shown. Business D has the lowest unit costs, perhaps because it operates at higher output – potentially benefitting from economies of scale.