Fixed Cost Per Unit - Definition & Meaning
What is Fixed Cost Per Unit?
Fixed cost per unit is the amount of money required to do one unit of a particular business activity. It is the fixed amount of money required to execute a unit of business activity. Fixed cost per unit enables a business to understand its performance. If the fixed cost per unit is less, it means that the business is more profitable and vice versa.
It can be understood in terms of marketing and advertising as follows. An advertising budget is the amount of money a company is willing to earmark to accomplish its marketing goals.
Common methods used for calculating Advertising Budgets are
1. Percentage of sales & Unit of sales Method
2. Affordable method
3. Task and objective method
4. The competitive parity method
Unit of sales Method
Advertising budget is determined based on the number of units sold in the last year. In this method a fixed amount for each unit of sale is determined and allocated. This method of advertisement budget allocation is usually carried out by high value consumer durable goods producers such as automobiles, AC and refrigerator manufacturers.
Let us assume that the manufacturing cost per unit of coffee maker for ABC is Rs 1500 and Rs.60 is the advertising cost required to sell the product. And the projected sales figure is 10,000 coffee maker for the coming year , then the total advertising budget can be calculated as
10,000x60=Rs. 6,00,0000
Sometimes percentage of sales method leads to misappropriation of funds i.e over allocation or under allocation. In such cases unit of sales method gives a closer estimate of the budget. This method is most suitable where the amount of product availability is affected by outside factors and also for specialty goods like washing machines and automobiles.
This method has its own disadvantages as it is dependent on the sales numbers. When sales decrease we may need more budget in advertisement as decrease in budget might lead to further decline in sales. Both the percentage of sales method and fixed cost per unit methods are not suitable for dynamic markets. However they are useful guides for deciding the budget in combination with other methods
Hence, this concludes the definition of Fixed Cost Per Unit along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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