Intermediate level · Module 2: Pricing Strategy · Lesson 1 of 3
Costing a Product
Know what each unit really costs.
In this lesson you will
- Separate variable and fixed costs
- Calculate full cost per unit
Key concepts
variable costsfixed costscost per unitowner's time
The lesson
Variable costs change with each unit (ingredients, packaging); fixed costs stay the same each month (rent, phone, transport to market).
Full cost per unit = variable cost + fixed costs ÷ expected units.
Include your own time as a cost, or you may be working for nothing.
Step by step
- List variable costs per unit.
- List monthly fixed costs.
- Estimate monthly units.
- Calculate full cost.
Pricing a one-litre bottle of liquid soap
From costs to price, checked against the market and break-even.
| Item | Working | Amount |
|---|---|---|
| Variable cost | ingredients 1,800 + bottle and label 700 | 2,500 |
| Fixed costs per bottle | 300,000 per month ÷ 400 bottles | 750 |
| Full cost | 2,500 + 750 | 3,250 |
| Cost-plus price (40% markup) | 3,250 × 1.4 | 4,550 |
| Chosen price | below the main competitor at 5,000 | 4,500 |
| Break-even volume | 300,000 ÷ (4,500 − 2,500) | 150 bottles a month |
Explanation
At 4,500 SSP each bottle contributes 2,000 SSP towards fixed costs; after 150 bottles a month the business makes a profit.
Selling the expected 400 bottles gives (4,500 − 2,500) × 400 − 300,000 = 500,000 SSP profit a month, before the owner's pay.
Check your understanding
150 × 2,000 = 300,000, exactly the fixed costs.
Practice activity
Cost your main product.
Expected result: A complete cost per unit.
Check your understanding
-
Give the formula for full cost per unit.
Show answer
Variable cost + fixed costs ÷ expected units.
-
Why include your own time?
Show answer
Otherwise the business may not really pay you.
Taught live by an instructor — online or in person. Free course lessons are for self-study and do not lead to a certificate — see registration options.