Entrepreneurship & Digital Business · Intermediate level

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

  1. List variable costs per unit.
  2. List monthly fixed costs.
  3. Estimate monthly units.
  4. Calculate full cost.
Worked calculation

Pricing a one-litre bottle of liquid soap

From costs to price, checked against the market and break-even.

Amounts in SSP per bottle unless stated (illustrative)
ItemWorkingAmount
Variable costingredients 1,800 + bottle and label 7002,500
Fixed costs per bottle300,000 per month ÷ 400 bottles750
Full cost2,500 + 7503,250
Cost-plus price (40% markup)3,250 × 1.44,550
Chosen pricebelow the main competitor at 5,0004,500
Break-even volume300,000 ÷ (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

  1. Give the formula for full cost per unit.

    Show answer

    Variable cost + fixed costs ÷ expected units.

  2. 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.