Return on Software: Maximizing the Return on Your Software Investment

Determining Unit Cost

The concept of unit cost is quite simple in principle: If Gizmo Corporation sells widgets and fubars, how much does it cost to produce each widget and each fubar? Knowing the unit cost allows the company to determine a minimum price for its products and services. A company almost certainly doesn't want to sell anything for less than it cost to produce; they probably want to allow for some reasonable amount of profit over the unit cost.

Some companies set their prices by adding a fixed profit margin (as a percent) over the unit cost. Suppose the unit cost for widgets is $100. If the company defines an 18% margin, the selling price of widgets is $118. In fact, the selling price should be based on what customers are willing ...