If 10,000 units are sold the variable cost per unit sold is closest to

Variable cost per unit refers to the cost of production of each unit produced in the company, which changes when the volume of the output or the level of the activity changes in the organization, and these are not the committed costsCommitted Costs are fixed, budgeted, or confirmed payments to be made in the future to vendors for goods or services to be taken, which are necessary for the smooth flow of the business and whose absence may disrupt the main operations of the business, potentially having a significant impact on the company.read more of the company as they occur only in case there is the production in the company.

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Variable Cost Per Unit Formula
Example of Variable Cost Per Unit
Disadvantage
Important Points
Recommended Articles

Variable Cost Per Unit Formula

The formula for calculating the Variable Cost Per Unit is as follows.

Variable Cost Per Unit = Total Variable Expenses / Output of the Company

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Source: Variable Cost Per Unit (wallstreetmojo.com)

Where,

Total Variable Expenses = Total variable expenses refers to all those costs incurred by the company during the period total of which change when the volume of the output or the activity changes in the company where the change in the variable expenses will be in the proportion of the difference in the output of the company. Some common variable costs include the cost of the raw material, cost of the direct labor or the casual labor, fuel expenses, packaging expenses, etc.
The Output of the Company = Output refers to the total number of units produced by the company during consideration.

Example of Variable Cost Per Unit

The following is the example of a variable cost per unit.

X ltd. has the business of manufacturing and selling readymade garments in the market. In September 2019, it incurred some of the expenses given below. Also, during the same month, it produced 10,000 units of the goods. Mr. X now wants to know the variable cost per unit for September 2019.

Transactions during the month are as follows:

Direct material CostDirect Material Cost is the total cost incurred by the company in purchasing the raw material along with the cost of other components including packaging, freight and storage costs, taxes, etc. that are related directly to the manufacturing and production of various products of the company.read more for the month: $ 1,000,000
Direct labor costDirect labor costs refer to the total cost incurred by the company for paying the wages and other benefits to its employees against the task performed by them, which are straight away related to the manufacturing of the products or provision of the services.read more for the month: $ 500,000
Paid the rent for the whole year, amounting to $ 48,000.
Paid for the packing expenses required in September amounting $ 20,000
Other direct manufacturing overheadManufacturing Overhead is the total of all the indirect costs involved in manufacturing a product like Property Tax on the production premise, Remunerations of maintenance personnel, Rent of the manufacturing building, etc. read more for the month amounts to $ 100,000
Insurance Expenses for the whole year paid in September amounting to $ 24,000.

Calculate the variable cost per unit for September.

Solution

Calculation of Total Variable Expenses using below formula is as follows,

Total Variable Expenses = Direct Material Cost + Direct Labor Cost + Packing Expenses + Other Direct Manufacturing Overhead

= $ 1,000,000+ $ 500,000 + $ 20,000 + $ 100,000
Total Variable Expenses = $ 1,620,000

Output of the company = 10,000 units

Calculation of Variable Cost Per Unit

= $ 1,620,000 / 10,000
= $ 162

Thus for September 2019, the variable cost per unitCost per unit is defined as the amount of money spent by a corporation over a period of time to produce a single unit of a specific product or service, and it takes into account two components in its calculation: variable and fixed costs. It aids in determining the selling price of the company's product or services.read more of the company comes to $162.

Working:

Direct material expenses change with change in the production level and thus will be considered a variable cost.
Direct labor expenses change with change in the production level and thus will be considered a variable cost.

Advantages

The different advantages are as follows:

Disadvantage

The disadvantage is as follows:

If the company cannot segregate the expenses into variable and fixed costs correctly, or in case any error occurs in such bifurcation. The variable cost per unit cannot be calculated correctly.

Important Points

The different vital points are as follows:

To calculate the variable cost per unit, the company requires two components, which include total variable expenses incurred during the period and the total level of production of the company.

A company with a relatively high variable cost will be able to estimate the profit marginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more per unit more accurately.

Conclusion

Thus, the variable cost per unit is a cost per unit incurred by the company, which changes with the change in the company’s production level. To calculate the variable cost per unit, the company requires two components, which include total variable expenses incurred during the period and the total level of production of the company.

It helps in the calculation of the contribution per unit and break-even analysis of the company, which will help the company’s management in the decision-making process that may be required in the future for expanding the business and approval of the new orders.