Profit Per Unit Calculator

How the number is derived

Profit per unit is price less every variable cost of that unit. Where it differs from contribution margin is intent rather than arithmetic: contribution is used to make marginal decisions, and profit per unit is usually used to compare products or to check that a price is viable.

Whether to include an allocated share of fixed costs is the judgement. For comparing products, allocate, otherwise a product consuming enormous warehouse space looks identical to one that fits in a drawer. For deciding whether to accept one more order, do not.

An example

A $45 product with $29.52 of variable cost clears $15.48 per unit. If the business has $38,000 of monthly fixed costs and sells 3,000 units across the catalogue, an even allocation adds $12.67 of fixed cost, leaving $2.81 of fully absorbed profit.

That $2.81 is a very different number from $15.48 and both are useful. The first says the product barely covers its share of the business; the second says every additional unit is worth $15.48 of contribution.

If the product were dropped, the business would lose $15.48 per unit of contribution and keep all $38,000 of fixed costs, which is why marginal decisions must use the unallocated figure.

The limitations

Even allocation of fixed costs is almost always wrong. A bulky slow-moving product consumes far more warehouse space per unit than a small fast one, and allocating overhead per unit rather than per unit of the constraint makes the wrong products look profitable.

The figure also ignores time. Two products with identical unit profit are not equivalent if one takes three minutes to pack and the other takes fifteen, and in a business where labour is the binding constraint that difference is the entire story.

What this changes

Use the unallocated figure for pricing, discounting and any decision about one more sale. Use an allocated figure, allocated by whatever resource is actually scarce, for range decisions.

If you can only maintain one number, maintain the unallocated one. It is the more frequently needed of the two and the harder to reconstruct after the fact, because the allocation basis changes as the business does.

Choosing the right denominator

Profit per unit is only one of several per-something figures, and the useful one is per unit of whatever you run out of first.

For a business constrained by capital, profit per pound invested is the right measure. It favours fast-turning products regardless of unit profit. For one constrained by warehouse space, profit per cubic foot per month. For a maker constrained by their own hours, profit per hour of making. For a business constrained by advertising budget, profit per pound of acquisition cost.

Most catalogues look substantially different under each. A business that has only ever ranked by unit profit or by margin percentage will usually find, on running one of these, that some of its best-loved products are among its worst uses of the constraint, and that a few unglamorous lines are carrying the operation.