What Causes Fluctuating Unit Cost?

When a company develops a marketing plan for releasing a new product, part of that plan is dedicated to determining the unit cost. Fluctuations in the unit cost affect company profit margins and the ability of the company to maintain necessary production levels. There are several reasons why a product unit cost fluctuates that a business owner needs to understand to maintain a competitive profit margin.

An initial unit cost is developed based on a projected demand that determines the initial production levels. The unit cost fluctuates when that demand does not follow the projections in the marketing plan. Production costs are tied to buying raw materials and the man hours needed to manufacture and deliver the product. If demand drops, then the quantities of raw materials needed drops. Buying raw materials in small quantities can increase the per unit price for production. If the demand is higher than expected, then the increase in manpower needed to manufacture products can affect the unit price.

Businesses buy raw materials in bulk to avoid the fluctuation in pricing that can occur in a particular market. If the cost of materials drops, then the company can either lower the per unit price to sell more product or take in more profit per unit by keeping the price the same. But if raw material costs go up, then the unit price will have to go up to maintain the product profit margin or profit will have to be sacrificed.

Unit costs take into account the company overhead required to manufacture, package, advertise and ship the product. A rise or fall in any of these overhead costs will have an effect on the unit cost. If your shipping company decides to raise its rates on getting your products out to your warehouses, then that rise in cost has to be reflected in the unit price to maintain profitability.

If you buy materials from overseas, or ship your products to international warehouses, then the fluctuation in the value of the United States dollar will affect your unit cost. If the dollar drops in value, then you will need to pay more for the materials you buy overseas and it may cost you more to ship products to international warehouses.