How to Reduce the Unit Cost in a Business

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Reducing the unit cost of products makes a business more profitable by widening the margin between what it costs to produce a product and what you can charge for it. You can reduce the unit cost of products by lowering your overhead cost per item, by paying less for rent and utilities or by increasing production volume so that you lessen the average overhead cost per unit. You can also reduce your cost per unit by using less expensive materials or increasing production efficiency, which decreases the cost of labor per unit.

Things You'll Need

  • Bookkeeping system
  • Reduce your overhead costs. Find a location with cheaper rent, consider subletting your facility during down time and evaluate your utility bills, looking for ways to cut back. If business is slow in your area, you may also be able to negotiate with your landlord for cheaper rent.

  • Increase your sales. If you sell more product, then your unit cost decreases because you average your overhead expenses between a greater number of items.

  • Find less expensive materials to use. Try different alternatives, looking for options that cost less but do not lessen the quality of your product. Buy directly from suppliers, cutting out the cost of the middleman. Buy in volume, if you have sufficient storage space and you'll use the extra inventory within a reasonable time frame. But don't unnecessarily tie up your capital in unused inventory.

  • Evaluate your production processes looking for ways to make them more efficient. Efficiency reduces the cost of labor per unit. Look for bottlenecks, or points in the process where production backlogs occur. Direct extra resources towards alleviating these bottlenecks. Learn the individual quirks and skills of your workers in order to schedule them for shifts that make the most of their abilities. Lean the optimum batch size, or the ideal amount to produce at once to achieve economies of scale without creating backlogs. Invest cautiously in equipment and technologies that will improve your production efficiency.

  • Keep detailed and accurate records that will enable your to track and evaluate your unit costs. Record all of your expenses, and keep production logs detailing production hours and activities.

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