Avoidable Cost Per Unit Calculator
This tool helps you determine the direct cost saved for each unit of production or sales discontinued. Avoidable costs are expenses that would *not* be incurred if a specific activity, project, or product line were stopped.
Enter the total costs that can be avoided and the number of units related to those costs to calculate the avoidable cost per unit. Ensure consistent currency and units.
Enter Costs and Units
Understanding Avoidable Costs and Per Unit Calculation
What are Avoidable Costs?
Avoidable costs, also known as escapable costs, are expenses that can be eliminated or saved if a particular activity, segment, product line, or project is discontinued or not undertaken. They are distinct from unavoidable or sunk costs, which will persist regardless of the decision.
Why Calculate Avoidable Cost Per Unit?
Calculating the avoidable cost per unit is crucial for decision-making, especially when considering discontinuing a product or service. It provides a clear picture of the *direct* cost savings associated with each unit no longer produced or sold. This helps in assessing profitability, setting prices, and making strategic choices about resource allocation.
Avoidable Cost Per Unit Formula
The calculation is straightforward:
Avoidable Cost Per Unit = Total Avoidable Costs / Number of Units
For example, if shutting down a small product line saves $10,000 in specific expenses (like direct labor or materials unique to that line) and that line produced 2,000 units, the avoidable cost per unit is $10,000 / 2,000 units = $5 per unit.
It's important to accurately identify which costs are truly *avoidable*. Fixed costs like rent or salaries of staff who would be redeployed are generally *not* avoidable in the short term unless their elimination is a direct result of stopping the activity.
Avoidable Cost Per Unit Examples
Here are some scenarios illustrating the calculation:
Example 1: Discontinued Product Line
Scenario: A company stops producing a product line. The avoidable costs (specific materials, direct labor, dedicated machinery rental) total $5,000 per month. The line produced 1,000 units per month.
Calculation: Avoidable Cost Per Unit = $5,000 / 1,000 units
Result: $5.00 per unit.
Conclusion: Stopping this product line saves $5 in direct costs for every unit not produced.
Example 2: Reduced Sales Volume
Scenario: Due to decreased demand, sales drop by 500 units. Variable costs directly tied to these units (sales commissions, packaging) total $1,250.
Calculation: Avoidable Cost Per Unit = $1,250 / 500 units
Result: $2.50 per unit.
Conclusion: Each lost sale unit avoids $2.50 in variable costs.
Example 3: Special Project Cost Savings
Scenario: A temporary project producing 200 specialized components is completed. Costs specifically incurred for this project (unique raw materials, temporary staff wages) were $4,000.
Calculation: Avoidable Cost Per Unit = $4,000 / 200 components
Result: $20.00 per component.
Conclusion: The avoidable cost associated with producing one of these components was $20.
Example 4: Outsourcing Decision Analysis
Scenario: A company considers outsourcing production of 5,000 units. Internal costs that would be eliminated by outsourcing (specific manufacturing labor, utilities for that area) total $30,000.
Calculation: Avoidable Cost Per Unit = $30,000 / 5,000 units
Result: $6.00 per unit.
Conclusion: Outsourcing avoids $6 per unit in internal costs. This can be compared to the outsourcing fee per unit.
Example 5: Evaluating a Segment
Scenario: A company is evaluating a business segment that sold 10,000 units last year. Costs directly attributable and avoidable if the segment closed (specific marketing, dedicated support staff) were $150,000.
Calculation: Avoidable Cost Per Unit = $150,000 / 10,000 units
Result: $15.00 per unit.
Conclusion: The avoidable cost per unit for this segment was $15.
Example 6: Material Savings
Scenario: Implementing a new process saves $0.50 in direct material cost per unit. For 500 units, the total material savings (avoided cost) is $250.
Calculation: Avoidable Cost Per Unit = $250 / 500 units
Result: $0.50 per unit.
Conclusion: The calculation confirms the $0.50 per unit material saving.
Example 7: Reduced Production Batch
Scenario: A production batch is reduced by 300 units. The direct labor and power costs directly tied to the production of these 300 units are $900.
Calculation: Avoidable Cost Per Unit = $900 / 300 units
Result: $3.00 per unit.
Conclusion: Reducing the batch size avoids $3 in cost for each unit not produced.
Example 8: Comparing Alternatives
Scenario: Company A produces 100 units with $2,000 in avoidable costs. Company B produces 150 units with $2,550 in avoidable costs. Calculate per unit costs for both.
Calculation for A: Avoidable Cost Per Unit = $2,000 / 100 units = $20.00 per unit.
Calculation for B: Avoidable Cost Per Unit = $2,550 / 150 units = $17.00 per unit.
Conclusion: Company B appears to have a lower avoidable cost per unit for its production volume.
Example 9: Impact of Efficiency
Scenario: After efficiency improvements, the avoidable cost (primarily labor) for producing 1,000 units dropped from $4,000 to $3,500.
Old Calculation: $4,000 / 1,000 units = $4.00 per unit.
New Calculation: $3,500 / 1,000 units = $3.50 per unit.
Conclusion: Efficiency saved $0.50 in avoidable cost per unit.
Example 10: Zero Avoidable Costs (for illustration)
Scenario: A company considers stopping a service (500 units). However, analysis shows *no* costs would actually be eliminated (e.g., staff would be reassigned, facilities still needed). Total avoidable costs = $0.
Calculation: Avoidable Cost Per Unit = $0 / 500 units
Result: $0.00 per unit.
Conclusion: In this case, discontinuing the service has no direct cost savings per unit.
Frequently Asked Questions about Avoidable Costs
1. What is the formula for Avoidable Cost Per Unit?
Avoidable Cost Per Unit is calculated by dividing the Total Avoidable Costs by the Number of Units related to those costs: `Total Avoidable Costs / Number of Units`.
2. What's the difference between avoidable and unavoidable costs?
Avoidable costs disappear if an activity stops. Unavoidable costs (like sunk costs or allocated fixed costs that won't change) persist regardless of the decision to stop a specific activity.
3. Why is calculating avoidable cost per unit important?
It helps in decision-making, particularly in scenarios like discontinuing a product, service, or segment. It quantifies the direct cost savings per unit, aiding in profitability analysis and strategic choices.
4. Are fixed costs ever avoidable?
Yes, some fixed costs can be avoidable if they are specific to the activity being discontinued (e.g., rent on a specific building used *only* for that product line, which can be terminated or sublet; or salaries of staff who would be terminated, not redeployed).
5. Are variable costs always avoidable?
Variable costs (like direct materials, direct labor, sales commissions) are generally avoidable if they are directly tied to the production or sale of a specific unit or batch of units. However, some variable costs might have minimum thresholds.
6. What inputs does this calculator need?
It needs the Total Amount of Avoidable Costs and the corresponding Number of Units.
7. Can the number of units be zero?
No, the Number of Units cannot be zero, as division by zero is mathematically undefined. If no units were produced or sold, the concept of cost *per unit* is not applicable.
8. Can costs or units be negative?
No, both Total Avoidable Costs and Number of Units must be non-negative values (zero or positive) for the calculation to be meaningful in this context.
9. Does this calculator help decide if a product line is profitable?
While it identifies the cost savings per unit if you stop, it doesn't directly calculate profitability. For that, you would typically compare the avoidable cost per unit to the revenue or contribution margin per unit.
10. What units should I use for the inputs?
Use consistent units. For Total Avoidable Costs, use your relevant currency ($, £, €). For Number of Units, use counts (items, pieces, batches). The output will be in Currency per Unit (e.g., $ per item).
