Unit Cost

Simply put, the unit cost of a product adds all of the fixed and variable costs incurred to produce it and divides that by the number of units producer over a given period of time. Calculating unit costs is vital as it enables companies to work out their pricing policies and fix product pricing at a level that enables them to be profitable. At a certain level of production, companies will find the unit cost sweet spot. This is reached when production volumes rise to a level at which fixed costs are spread over a bigger base that lowers cost per unit to a greater degree than higher variable costs increase cost per unit.