Blog · Finance metrics and formulas · Manufacturing
Calculate gross, contribution and fully allocated profit per unit from SKU sales and cost records. Follow a worked allocation, reconcile the totals and see how lower volume changes unit profit.
Profit per unit is profit for a defined set of sales divided by the units sold. Choose gross profit, contribution or fully allocated profit before calculating it, because each answers a different operating question. Match the sales quantities, revenue and costs to the same SKU and period.
Gross profit per unit = (Net revenue − Cost of goods sold) / Net units sold
Contribution per unit = (Net revenue − Variable production costs − Other variable costs) / Net units sold
Fully allocated profit per unit = (Net revenue − Cost of goods sold − Other variable costs − Allocated period expenses) / Net units sold
In the final formula, cost of goods sold already includes the fixed manufacturing overhead assigned to sold units. Do not subtract that overhead again. A separate fixed period expense allocation belongs below gross profit.
The IRS manufacturing cost guidance includes direct production labor and relevant manufacturing overhead in cost of goods sold. That accounting classification differs from the fixed-versus-variable distinction used for contribution. The contribution margin ratio guide covers that distinction in more detail.
Gross profit per unit helps explain product pricing against recorded inventory cost. Contribution helps assess sales mix and the effect of an incremental order within available capacity. Fully allocated profit shows whether sales cover the assigned share of the broader business's costs. It depends on the allocation policy as well as the product's direct economics.
Bring a sales export with invoice line, date, SKU, quantity, net revenue and return reference. Join the corresponding cost record by the same line or inventory reference. Add the variable selling and fulfillment charges associated with those sales.
For fixed costs, retain both the expense pool and the driver used to allocate it. Machine hours might explain a production-overhead allocation; service hours might explain a customer-support pool. These are illustrative choices. Finance and operations should agree on the driver and apply it consistently.
The IRS inventory cost rules distinguish purchased merchandise cost from the direct and indirect costs of produced goods. Use your approved cost records rather than replacing them with a convenient purchase-price field.
Use a consistent selling unit. A case, individual item and component are different denominators. If a SKU is sold in several pack sizes, convert quantities and costs to the same basis before comparing it. The neighboring cost per unit guide focuses on building that cost side.
An illustrative US manufacturer sells two SKUs during one month. All quantities below are net units sold. The cost records separate variable production cost from fixed manufacturing overhead, and no fixed cost is included in the other variable expenses.
First, allocate the fixed pools using the approved drivers:
| Fixed cost pool | Pool (USD) | SKU A driver | SKU B driver | Rate (USD per driver unit) | A allocation (USD) | B allocation (USD) |
|---|---|---|---|---|---|---|
| Manufacturing overhead | 10,000 | 400 machine hours | 600 machine hours | 10.00 | 4,000 | 6,000 |
| Period support expenses | 12,000 | 70 support hours | 50 support hours | 100.00 | 7,000 | 5,000 |
The overhead rate is $10,000 / (400 + 600) = $10 per machine hour. The support rate is $12,000 / (70 + 50) = $100 per support hour. Each pool is fully allocated: $4,000 + $6,000 = $10,000, and $7,000 + $5,000 = $12,000.
| Input | SKU A | SKU B | Total |
|---|---|---|---|
| Net units sold | 1,000 | 500 | 1,500 |
| Net revenue (USD) | 50,000 | 40,000 | 90,000 |
| Variable production costs (USD) | 28,000 | 22,000 | 50,000 |
| Fixed manufacturing overhead (USD) | 4,000 | 6,000 | 10,000 |
| Cost of goods sold (USD) | 32,000 | 28,000 | 60,000 |
| Other variable costs (USD) | 3,000 | 2,000 | 5,000 |
| Allocated period expenses (USD) | 7,000 | 5,000 | 12,000 |
Apply each profit definition to those same rows:
| Result | SKU A | SKU B | Total |
|---|---|---|---|
| Gross profit (USD) | 18,000 | 12,000 | 30,000 |
| Contribution (USD) | 19,000 | 16,000 | 35,000 |
| Fully allocated profit (USD) | 8,000 | 5,000 | 13,000 |
| Gross profit per unit (USD) | 18.00 | 24.00 | 20.00 |
| Contribution per unit (USD) | 19.00 | 32.00 | 23.33 |
| Fully allocated profit per unit (USD) | 8.00 | 10.00 | 8.67 |
For SKU A, gross profit is $50,000 − $32,000 = $18,000. Contribution adds back $4,000 of fixed manufacturing overhead and subtracts $3,000 of other variable costs, producing $19,000. Fully allocated profit is $19,000 − $4,000 − $7,000 = $8,000.
Dividing each amount by 1,000 units gives $18, $19 and $8 per unit. Calculations use unrounded inputs; displayed per-unit amounts round to the nearest cent.
Rebuild the company's revenue from all cost categories and fully allocated profit:
$50,000 variable production + $10,000 fixed manufacturing + $5,000 other variable + $12,000 period expenses + $13,000 profit = $90,000 revenue
The weighted result is $13,000 / 1,500 = $8.67 profit per unit. The simple average of the SKU results, ($8 + $10) / 2 = $9, gives the smaller SKU too much weight. When aggregating products, divide total profit by total comparable units.
These SKU calculations complement the broader unit economics page, which examines customer acquisition, retention and payback. A profitable item can still belong to a customer relationship that costs too much to acquire or serve.
Hold SKU A's selling price at $50, variable production cost at $28 and other variable cost at $3 per unit. Keep its assigned fixed costs at $4,000 manufacturing and $7,000 period expenses. If sales fall to 800 units, revenue becomes $40,000, variable production costs $22,400 and other variable costs $2,400.
Contribution remains $19 per unit, but total contribution becomes $15,200. After the unchanged $11,000 fixed allocation, profit is $4,200, or $5.25 per unit. This isolates volume: no price, mix or cost-rate change is assumed.
Bring a sample of your own SKU sales, quantities and cost allocation files to Covirage. Covirage maps the columns, and its tools compute and check each selected profit measure; the external AI model explains the results with every figure traced to its rows. Create a free Covirage account, then set up your business and bring your own export.
See the supporting customer profitability page for comparing the customers buying those SKUs.
Only when the profit definition subtracts variable costs and stops there. Gross profit includes the company's cost of goods sold classification, which can contain fixed manufacturing overhead. Fully allocated profit also subtracts assigned period expenses. Name the measure beside every result.
Use units sold when the numerator is profit on recognized sales. Units produced belong in a production cost calculation, including work that remains in inventory. Match returns, credits and cost reversals so the revenue, profit and quantity cover the same population.
Yes. The product can cover its variable costs while failing to cover the fixed costs assigned to it. Check which fixed costs would actually disappear before discontinuing it, because an allocation does not establish that an expense is avoidable.