The Economics of one unit is a method of analysis used to determine financial feasibility in the profits obtained from the sale of one unit of product. If you have a business idea, but you haven’t yet vetted it, and aren’t sure if it is viable, this is what you would use to determine if the idea will actually make you money.

1. The Economics
of
One Unit

2. The Economics of one unit is a method of
analysis used to determine financial feasibility
in the profits obtained from the sale of one
unit of product. If you have a business idea,
but you haven’t yet vetted it, and aren’t sure
if it is viable, this is what you would use to
determine if the idea will actually make you
money.

3. You’re looking specifically at what is called “variable
costs” -which are costs that vary with production. As
you produce and sell more of something, you incur
more of those costs.
In this example we’ll use a coffee shop. Coffee shops
have quite a few variable costs. The more coffee you
sell, the more coffee beans you need to buy, the
more cups, and lids, and sleeves and sugar you need
to buy. If you sell no coffee, you incur no costs, but if
you sell lots of coffee, you incur more of those costs.

4. This is opposed to fixed costs, which do not vary with
production, i.e. rent, which does not vary with coffee
production at all. And keep in mind that one unit does
not equal one item. One unit could be a gross of 144
items. One unit could be a case of 12, or in the
example of our coffee shop, it could be one single cup
of coffee.
First thing you have to figure out is selling price per
unit. This is important because you have to know how
much is left over after you subtract all of the costs of
the item.

5. Next you will be determining the figure in the three categories
of variable costs. 1 - Direct materials: all of the
items/ingredients that go into creation/producing/making the
item or service.
The best way to look at this to determine if it is a direct
material? If you did not have this item, you would not be able
to produce the good or service. You want to determine the
cost of the direct material per unit.
For example, you will be buying coffee beans in bulk, so you
will need to determine the amount of bean that will go into
one cup and how much those beans will cost. (1lb of coffee is
$10 and makes ten cups of coffee, so the direct materials cost
for one cup of coffee’s worth of beans is $1)

6. 2- Direct labor: manpower needed to produce the good or
offer the service, per unit. Obviously some division will be
needed because your barista will not be making one cup of
coffee per hour. How many cups of coffee can they make per
hour, what is the salary of the barista?

7. 3 - Other variable costs. These do vary with production, but
are not specific with one item cost. These can be things like
shipping, packaging for shipment, or sales commission, and
don’t fit into either of the other two categories.

8. Once you figure out all of those things, you can figure out
what your gross profit margin per unit is, and what your
contribution margin per unit is. Contribution margin represents
the final product of the economics of one unit. This is the
amount of money that contributes towards covering a firm’s
fixed costs (i.e. utilities, salaries, advertising, insurance, interest,
rent, and depreciation).