BUS 436 Unit Economics Quiz


How Much Money You Made: Price/Unit * # of Units Sold

Variable Costs

Costs that vary more or less proportionally with # of units sold:
Direct Materials (Bill of Materials, Packaging, Shipping) and Direct Labor (Manufacturing Line Tech, Sales Commission/Unit)


All costs directly associated with making and delivering a product

Fixed Costs or Period Costs

Costs calculated over a unit of time (a period) that stay fairly constant regardless of volume:
EX: Rent, Management salaries/non-production payroll, Marketing/Advertising, Insurance, Utilities


How much money contributes to paying off fixed costs:
Revenue- Variable Costs

Contribution Margin


Breakeven (Cash Flow Positive)

# of Units you need to sell to cover fixed costs
Fixed Costs/Contribution

Net Profit

Profit left over after all expenses
1. (Units Sold * Contribution) - Fixed Costs
2. Revenue - Variable Costs - Fixed Costs

Primary Sunk Investment (PSI)

Large Non-Variable & Non-Periodic Costs
EX: Furniture & Computers, Tooling, Equipment, Patents

Payoff Time

PSI/Net Operating Profit

Unit Economics Strategy

Revenue - VC = Contribution - FC = Net Profit

Three Critical Ratios

1. Breakeven # of Units = Fixed Period Costs/Gross Profit per Unit
2. Overall Breakeven (Years) = Investment (PSI)/Operating Profit
3. Breakeven as % of Capacity = Breakeven # of Units/ Capacity