Item Unit Price & Total Cost: Calculations & Examples

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  • 0:00 What's a Unit Price?
  • 1:52 Overhead Costs vs.…
  • 2:23 Total Cost
  • 3:35 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Two of the most important figures for a business are the unit price and the total cost. In this lesson, we learn how to calculate both as well as the relationship between the two figures.

What's a Unit Price?

As the head widget purchaser for your company, you are constantly immersed in a world of prices and quantities. However, you want more. In order to get promoted, you have to make sure that the next person to hold your current job is highly trained. He is set to show up to your office on Monday morning, so you rest up and prepare yourself, ready to help this person make the most of the exciting world of widget purchasing.

When Monday morning finally comes around, you're a little disappointed. This person seems to know everything there is about using widgets. From gizmos to do-dads, it's clear that he has a great appreciation for what your company buys. However, he really doesn't get the nuts and bolts of how they are bought. Luckily, he has you.

You sit him down and bring up a webpage showing the prices per widget at various manufacturers. As you bring it up, he loudly interrupts you. Seeing the unit price next to the quantity, he thinks that widgets are actually much cheaper than they are! You stop him in his tracks, explaining that those prices next to the quantities are the unit prices, or the prices for each individual widget if they are bought in those quantities. You have to buy the widgets in the given quantities to get the given price for the widget.

'But wait,' he asks, 'why does the price go down when you buy more?' You then explain that there are two types of cost that go into producing each widget. He looks at you puzzled. You explain that there are a variety of overhead costs, or costs unrelated to the production of each widget, associated with widget production. For example, you have to pay an accountant for bookkeeping, salespeople to work with clients, and janitors to keep everything clean. These costs don't go away if you sell only 10 widgets, and unless you undertake some really massive expansions, they stay the same no matter how many widgets you sell.

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