NCERT Textbook - Business Arithmetic | Entrepreneurship Class 12 - Commerce PDF Download

 Page 1


 174 
UNIT–5: BUSINESS ARITHMETIC   
"Take risks in your life. If you win, you can lead. If you lose, you can guide." 
– Swami Vivekanand 
Learning objectives: 
The learner will be able to: 
? Understand the concept of unit price 
? Calculate Break even point for Multiple products 
? Understand the meaning of inventory control and 
Economic Order Quantity 
? Enumerate the meaning of cash flow projection 
? Explain the concept of working capital 
? Understand the terminologies- financial management 
and budgets 
? Calculate Return on Investment 
? Explain the concept of Return on Equity 
Unit of sale, unit price and unit cost (multiple products 
or services) 
Unit of sale, we learnt last year, is required to understand 
the economics of the business in an easy and standardized 
manner and for tracking progress, comparing past with the future and to be able to take 
corrective action. In short, it is a management tool. 
We also learnt that when the shop or a business sells only one item – say milk (in packets) or 
mangoes or oranges, it is easy to determine the unit of sale and use it in variety of ways for 
proper management action. The unit of sale in these examples could be ?quantity – for example, 
one or a dozen? or ?weight – say kilograms? and the entrepreneur will use it for pricing, 
determining the cost per unit, gross profit per unit, establishing the sales trend, fixing sales 
target etc. 
Real world is not so simple. While some businesses may deal in only one item, the majority of 
them deal in many or large number of items. Let us review some examples.  
A grocery shop has hundreds of items on its shelves and if it is a super market, it has thousands 
of items. A restaurant will have the menu card that runs to a few pages and each page may have 
10 to 20 items. Thus, has a few hundred of items. A beauty parlor offers many treatments for the 
customers. 
In spite of such large number of items, the business person needs some quick and easy way of 
checking the progress of the business or plan corrective actions. How does one do it?  
Content 
? Unit of sale, Unit cost, Unit 
price for multiple products 
? Break even analysis for 
multiple products or 
services 
? Importance and use of 
cash flow projections 
? Budgeting and managing 
of finances 
? Computation of working 
capital 
? Inventory control and EOQ 
? Return on Investment (ROI) 
and Return on equity (ROE) 
Page 2


 174 
UNIT–5: BUSINESS ARITHMETIC   
"Take risks in your life. If you win, you can lead. If you lose, you can guide." 
– Swami Vivekanand 
Learning objectives: 
The learner will be able to: 
? Understand the concept of unit price 
? Calculate Break even point for Multiple products 
? Understand the meaning of inventory control and 
Economic Order Quantity 
? Enumerate the meaning of cash flow projection 
? Explain the concept of working capital 
? Understand the terminologies- financial management 
and budgets 
? Calculate Return on Investment 
? Explain the concept of Return on Equity 
Unit of sale, unit price and unit cost (multiple products 
or services) 
Unit of sale, we learnt last year, is required to understand 
the economics of the business in an easy and standardized 
manner and for tracking progress, comparing past with the future and to be able to take 
corrective action. In short, it is a management tool. 
We also learnt that when the shop or a business sells only one item – say milk (in packets) or 
mangoes or oranges, it is easy to determine the unit of sale and use it in variety of ways for 
proper management action. The unit of sale in these examples could be ?quantity – for example, 
one or a dozen? or ?weight – say kilograms? and the entrepreneur will use it for pricing, 
determining the cost per unit, gross profit per unit, establishing the sales trend, fixing sales 
target etc. 
Real world is not so simple. While some businesses may deal in only one item, the majority of 
them deal in many or large number of items. Let us review some examples.  
A grocery shop has hundreds of items on its shelves and if it is a super market, it has thousands 
of items. A restaurant will have the menu card that runs to a few pages and each page may have 
10 to 20 items. Thus, has a few hundred of items. A beauty parlor offers many treatments for the 
customers. 
In spite of such large number of items, the business person needs some quick and easy way of 
checking the progress of the business or plan corrective actions. How does one do it?  
Content 
? Unit of sale, Unit cost, Unit 
price for multiple products 
? Break even analysis for 
multiple products or 
services 
? Importance and use of 
cash flow projections 
? Budgeting and managing 
of finances 
? Computation of working 
capital 
? Inventory control and EOQ 
? Return on Investment (ROI) 
and Return on equity (ROE) 
 175 
Defining the unit of sale, unit price and unit cost & resultant gross profit in a meaningful way is 
the answer. Let us see how! 
In the examples used above, we all know that a customer does not buy all the items from the 
grocer at a given time, nor does he/she order all the items on the menu when visiting a 
restaurant. A customer coming to the beauty parlor does not avail of all the offered services. 
Neither do all customers buy or order or avail of same items or services. If this be the case, and 
it is, how does the business owner figure out what is going on in his/her business? 
This is when ?averages? come in to play and help the business owner. 
Let us take the example of a grocery store. Observe the process, as it will be applicable to many 
similar situations. Each customer coming in to buy things will have different requirements. 
This, then results in the ?billed amount? (or invoiced amount) being different for different 
people. For example, at the end of the day, the shop keeper found out the following. 
Number of customers Per customer billed amount (`) Total billed amount (`) 
5 500 2,500 
10 700 7,000 
15 1,000 15,000 
10 1,450 14,500 
25 2,000 50,000 
5 2,500 12,500 
10 3,100 31,000 
15 3,500 52,500 
5 5,000 25,000 
Total Weighted  Average Total 
100 2,100 2,10,000 
 
In other words, 100 customers bought items worth ` 2,10,000/- , thus giving an average of  
` 2,100/- per customer. You would notice that no one bought items worth "exactly" ` 2,100. 
However, the collective purchase by all of them yielded this average we arrived at. It is 
conceivable that on another day the average could be different. In a month, the average (derived 
on a daily basis) at the beginning of the month could be higher than towards the end. If the 
average is arrived for all the customers in a month then that could give a more realistic picture 
as the sample (total customers) would be larger. 
In this particular case, ?Customer? is the ?unit of sale? and the average purchase made by one 
customer (not the actual bill but total billed amount divided by total number of customers) is 
the "Unit Price". Taking the same example, the Unit Price per Customer (or per Unit of Sale) 
would be ` 2,100/-. 
Page 3


 174 
UNIT–5: BUSINESS ARITHMETIC   
"Take risks in your life. If you win, you can lead. If you lose, you can guide." 
– Swami Vivekanand 
Learning objectives: 
The learner will be able to: 
? Understand the concept of unit price 
? Calculate Break even point for Multiple products 
? Understand the meaning of inventory control and 
Economic Order Quantity 
? Enumerate the meaning of cash flow projection 
? Explain the concept of working capital 
? Understand the terminologies- financial management 
and budgets 
? Calculate Return on Investment 
? Explain the concept of Return on Equity 
Unit of sale, unit price and unit cost (multiple products 
or services) 
Unit of sale, we learnt last year, is required to understand 
the economics of the business in an easy and standardized 
manner and for tracking progress, comparing past with the future and to be able to take 
corrective action. In short, it is a management tool. 
We also learnt that when the shop or a business sells only one item – say milk (in packets) or 
mangoes or oranges, it is easy to determine the unit of sale and use it in variety of ways for 
proper management action. The unit of sale in these examples could be ?quantity – for example, 
one or a dozen? or ?weight – say kilograms? and the entrepreneur will use it for pricing, 
determining the cost per unit, gross profit per unit, establishing the sales trend, fixing sales 
target etc. 
Real world is not so simple. While some businesses may deal in only one item, the majority of 
them deal in many or large number of items. Let us review some examples.  
A grocery shop has hundreds of items on its shelves and if it is a super market, it has thousands 
of items. A restaurant will have the menu card that runs to a few pages and each page may have 
10 to 20 items. Thus, has a few hundred of items. A beauty parlor offers many treatments for the 
customers. 
In spite of such large number of items, the business person needs some quick and easy way of 
checking the progress of the business or plan corrective actions. How does one do it?  
Content 
? Unit of sale, Unit cost, Unit 
price for multiple products 
? Break even analysis for 
multiple products or 
services 
? Importance and use of 
cash flow projections 
? Budgeting and managing 
of finances 
? Computation of working 
capital 
? Inventory control and EOQ 
? Return on Investment (ROI) 
and Return on equity (ROE) 
 175 
Defining the unit of sale, unit price and unit cost & resultant gross profit in a meaningful way is 
the answer. Let us see how! 
In the examples used above, we all know that a customer does not buy all the items from the 
grocer at a given time, nor does he/she order all the items on the menu when visiting a 
restaurant. A customer coming to the beauty parlor does not avail of all the offered services. 
Neither do all customers buy or order or avail of same items or services. If this be the case, and 
it is, how does the business owner figure out what is going on in his/her business? 
This is when ?averages? come in to play and help the business owner. 
Let us take the example of a grocery store. Observe the process, as it will be applicable to many 
similar situations. Each customer coming in to buy things will have different requirements. 
This, then results in the ?billed amount? (or invoiced amount) being different for different 
people. For example, at the end of the day, the shop keeper found out the following. 
Number of customers Per customer billed amount (`) Total billed amount (`) 
5 500 2,500 
10 700 7,000 
15 1,000 15,000 
10 1,450 14,500 
25 2,000 50,000 
5 2,500 12,500 
10 3,100 31,000 
15 3,500 52,500 
5 5,000 25,000 
Total Weighted  Average Total 
100 2,100 2,10,000 
 
In other words, 100 customers bought items worth ` 2,10,000/- , thus giving an average of  
` 2,100/- per customer. You would notice that no one bought items worth "exactly" ` 2,100. 
However, the collective purchase by all of them yielded this average we arrived at. It is 
conceivable that on another day the average could be different. In a month, the average (derived 
on a daily basis) at the beginning of the month could be higher than towards the end. If the 
average is arrived for all the customers in a month then that could give a more realistic picture 
as the sample (total customers) would be larger. 
In this particular case, ?Customer? is the ?unit of sale? and the average purchase made by one 
customer (not the actual bill but total billed amount divided by total number of customers) is 
the "Unit Price". Taking the same example, the Unit Price per Customer (or per Unit of Sale) 
would be ` 2,100/-. 
 176 
In the case of a restaurant, the ?unit of sale? would be a ?Diner?. This is different from the 
person who pays the bill. A group my consist of 10 people or 5 or 2. At times it may even be 
one. In each case, the number of persons paying the bill would most likely be one. So it is more 
accurate to go by the number of ?Diners?. The ?Diner? is the ?Unit of Sale? and the average 
amount billed per ?Diner? would be the ?Unit Price?. In the case of a restaurant that provides 
only Buffet Lunch or Dinner, life is simple. It is like a single product business. 
You can now visualize how a beauty parlor or saloon can also use the same concept. The 
?Customer? is the ?Unit of Sale? and average billing per customer is ?Unit Price?. 
So we have understood Unit of Sale and Unit Price in multi product environment. What about 
Unit Cost. 
As you would recollect from your earlier study, unit cost refers to variable cost (also referred to 
as cost of goods sold). How do we calculate the unit cost in the case of multi product or service 
situations? If we understood the way we calculated the unit price, it should give us a clue. Let 
us take the grocery store again. 
Grocery store is a Trading Business. One buys and sells. So, the cost at which the items are 
purchased is known (just as its MRP at which you are selling). Therefore, at the end of the day, 
it is possible to know the purchase price of all the items and quantities that were sold. Let us 
suppose that it works out to ` 1,70,000/-. There were 100 units of Sale. So the unit cost is  
` 1,700/-.  
In some cases, there could be another way. For every item, if the purchase price is 80% of selling 
price, then in that particular case, the Unit Cost would be ` 1,680/- (= 80% of ` 2,100/-). 
Gross Profit would then be ` 400/- per unit of sale (` 2,100 - ` 1,700) in the first case and  
` 420/- per Unit of sale (` 2,100- ` 1,680) in the second case. This will depend on the industry 
specifics. 
Many industries have their unique thumb rules for the relationship between Unit Price and Unit 
Cost. In Fast Moving Consumer Goods Industry it could be 80 or 85% (cost as percentage age of 
selling price). In food industry, it could be 30 to 35% (COG as percentage age of selling price). 
Electronic items may have a different thumb rule. Where none exists, you may be able to 
develop your own. However, the more accurate way is to actually compute the costs as 
explained. 
An exercise 
A stationery store sold in one day the following items at the prices indicated. 
Products Price per unit (`) Quantity sold 
Student note book 40 35 
Reynolds pens 40 40 
Erasers  5 5 
Page 4


 174 
UNIT–5: BUSINESS ARITHMETIC   
"Take risks in your life. If you win, you can lead. If you lose, you can guide." 
– Swami Vivekanand 
Learning objectives: 
The learner will be able to: 
? Understand the concept of unit price 
? Calculate Break even point for Multiple products 
? Understand the meaning of inventory control and 
Economic Order Quantity 
? Enumerate the meaning of cash flow projection 
? Explain the concept of working capital 
? Understand the terminologies- financial management 
and budgets 
? Calculate Return on Investment 
? Explain the concept of Return on Equity 
Unit of sale, unit price and unit cost (multiple products 
or services) 
Unit of sale, we learnt last year, is required to understand 
the economics of the business in an easy and standardized 
manner and for tracking progress, comparing past with the future and to be able to take 
corrective action. In short, it is a management tool. 
We also learnt that when the shop or a business sells only one item – say milk (in packets) or 
mangoes or oranges, it is easy to determine the unit of sale and use it in variety of ways for 
proper management action. The unit of sale in these examples could be ?quantity – for example, 
one or a dozen? or ?weight – say kilograms? and the entrepreneur will use it for pricing, 
determining the cost per unit, gross profit per unit, establishing the sales trend, fixing sales 
target etc. 
Real world is not so simple. While some businesses may deal in only one item, the majority of 
them deal in many or large number of items. Let us review some examples.  
A grocery shop has hundreds of items on its shelves and if it is a super market, it has thousands 
of items. A restaurant will have the menu card that runs to a few pages and each page may have 
10 to 20 items. Thus, has a few hundred of items. A beauty parlor offers many treatments for the 
customers. 
In spite of such large number of items, the business person needs some quick and easy way of 
checking the progress of the business or plan corrective actions. How does one do it?  
Content 
? Unit of sale, Unit cost, Unit 
price for multiple products 
? Break even analysis for 
multiple products or 
services 
? Importance and use of 
cash flow projections 
? Budgeting and managing 
of finances 
? Computation of working 
capital 
? Inventory control and EOQ 
? Return on Investment (ROI) 
and Return on equity (ROE) 
 175 
Defining the unit of sale, unit price and unit cost & resultant gross profit in a meaningful way is 
the answer. Let us see how! 
In the examples used above, we all know that a customer does not buy all the items from the 
grocer at a given time, nor does he/she order all the items on the menu when visiting a 
restaurant. A customer coming to the beauty parlor does not avail of all the offered services. 
Neither do all customers buy or order or avail of same items or services. If this be the case, and 
it is, how does the business owner figure out what is going on in his/her business? 
This is when ?averages? come in to play and help the business owner. 
Let us take the example of a grocery store. Observe the process, as it will be applicable to many 
similar situations. Each customer coming in to buy things will have different requirements. 
This, then results in the ?billed amount? (or invoiced amount) being different for different 
people. For example, at the end of the day, the shop keeper found out the following. 
Number of customers Per customer billed amount (`) Total billed amount (`) 
5 500 2,500 
10 700 7,000 
15 1,000 15,000 
10 1,450 14,500 
25 2,000 50,000 
5 2,500 12,500 
10 3,100 31,000 
15 3,500 52,500 
5 5,000 25,000 
Total Weighted  Average Total 
100 2,100 2,10,000 
 
In other words, 100 customers bought items worth ` 2,10,000/- , thus giving an average of  
` 2,100/- per customer. You would notice that no one bought items worth "exactly" ` 2,100. 
However, the collective purchase by all of them yielded this average we arrived at. It is 
conceivable that on another day the average could be different. In a month, the average (derived 
on a daily basis) at the beginning of the month could be higher than towards the end. If the 
average is arrived for all the customers in a month then that could give a more realistic picture 
as the sample (total customers) would be larger. 
In this particular case, ?Customer? is the ?unit of sale? and the average purchase made by one 
customer (not the actual bill but total billed amount divided by total number of customers) is 
the "Unit Price". Taking the same example, the Unit Price per Customer (or per Unit of Sale) 
would be ` 2,100/-. 
 176 
In the case of a restaurant, the ?unit of sale? would be a ?Diner?. This is different from the 
person who pays the bill. A group my consist of 10 people or 5 or 2. At times it may even be 
one. In each case, the number of persons paying the bill would most likely be one. So it is more 
accurate to go by the number of ?Diners?. The ?Diner? is the ?Unit of Sale? and the average 
amount billed per ?Diner? would be the ?Unit Price?. In the case of a restaurant that provides 
only Buffet Lunch or Dinner, life is simple. It is like a single product business. 
You can now visualize how a beauty parlor or saloon can also use the same concept. The 
?Customer? is the ?Unit of Sale? and average billing per customer is ?Unit Price?. 
So we have understood Unit of Sale and Unit Price in multi product environment. What about 
Unit Cost. 
As you would recollect from your earlier study, unit cost refers to variable cost (also referred to 
as cost of goods sold). How do we calculate the unit cost in the case of multi product or service 
situations? If we understood the way we calculated the unit price, it should give us a clue. Let 
us take the grocery store again. 
Grocery store is a Trading Business. One buys and sells. So, the cost at which the items are 
purchased is known (just as its MRP at which you are selling). Therefore, at the end of the day, 
it is possible to know the purchase price of all the items and quantities that were sold. Let us 
suppose that it works out to ` 1,70,000/-. There were 100 units of Sale. So the unit cost is  
` 1,700/-.  
In some cases, there could be another way. For every item, if the purchase price is 80% of selling 
price, then in that particular case, the Unit Cost would be ` 1,680/- (= 80% of ` 2,100/-). 
Gross Profit would then be ` 400/- per unit of sale (` 2,100 - ` 1,700) in the first case and  
` 420/- per Unit of sale (` 2,100- ` 1,680) in the second case. This will depend on the industry 
specifics. 
Many industries have their unique thumb rules for the relationship between Unit Price and Unit 
Cost. In Fast Moving Consumer Goods Industry it could be 80 or 85% (cost as percentage age of 
selling price). In food industry, it could be 30 to 35% (COG as percentage age of selling price). 
Electronic items may have a different thumb rule. Where none exists, you may be able to 
develop your own. However, the more accurate way is to actually compute the costs as 
explained. 
An exercise 
A stationery store sold in one day the following items at the prices indicated. 
Products Price per unit (`) Quantity sold 
Student note book 40 35 
Reynolds pens 40 40 
Erasers  5 5 
 177 
Scale (12? plastic)  15 10 
Flip chart 10 5 
Sketch pens (one DOZEN) 25 3 
 
The shopkeeper also found out, based on the number of bills issued by him, that there were 50 
customers. If customer is the unit of sale, what is the ?Unit Price? in this case? If the cost of each 
stationery item is 75% of its selling price, calculate the ?Unit Cost? and the ?Gross Margin? per 
unit of sale. 
Exercises for practice 
Illustration 1: Beauty parlor 
A Beauty parlor had varying number of customers during 5 weeks. This information and the 
total weekly billing are in the following table. What are the ?Unit of sale? and the ?Unit Price? 
in this case? If the cost of goods sold or variable cost is 60% of the sale price, calculate the ?Unit 
Cost? and the ?Gross Margin? per Unit of Sale. 
Week # No. of customers Total amount  
billed (`) 
Average amount billed  
(`) per customer 
Week 1 10 1,000 100 
Week 2 17 1,445 85 
Week 3 13   923 71 
Week 4 22 5,082 231 
Week 5 18 3,150 175 
Total 80 11,600  
 
Illustration 2: Restaurant 
Number of people who took their meals and the total billing for each of the 5 weeks is in the 
following table. What are the ?Unit of sale? and the ?Unit Price? in this case?  If the variable 
cost is 50% of the sale price, calculate the ?Unit Cost? and the ?Gross Margin? per Unit of Sale. 
Weeks No. of people  
taking meals 
Total amount billed (`) Average amount 
billed (`) 
Week 1 120 18,000 150 
Week 2 60 12,300 205 
Week 3 70 10,220 146 
Week 4 80 17,680 221 
Week 5 90 21,600 240 
Total 420 79,800  
Page 5


 174 
UNIT–5: BUSINESS ARITHMETIC   
"Take risks in your life. If you win, you can lead. If you lose, you can guide." 
– Swami Vivekanand 
Learning objectives: 
The learner will be able to: 
? Understand the concept of unit price 
? Calculate Break even point for Multiple products 
? Understand the meaning of inventory control and 
Economic Order Quantity 
? Enumerate the meaning of cash flow projection 
? Explain the concept of working capital 
? Understand the terminologies- financial management 
and budgets 
? Calculate Return on Investment 
? Explain the concept of Return on Equity 
Unit of sale, unit price and unit cost (multiple products 
or services) 
Unit of sale, we learnt last year, is required to understand 
the economics of the business in an easy and standardized 
manner and for tracking progress, comparing past with the future and to be able to take 
corrective action. In short, it is a management tool. 
We also learnt that when the shop or a business sells only one item – say milk (in packets) or 
mangoes or oranges, it is easy to determine the unit of sale and use it in variety of ways for 
proper management action. The unit of sale in these examples could be ?quantity – for example, 
one or a dozen? or ?weight – say kilograms? and the entrepreneur will use it for pricing, 
determining the cost per unit, gross profit per unit, establishing the sales trend, fixing sales 
target etc. 
Real world is not so simple. While some businesses may deal in only one item, the majority of 
them deal in many or large number of items. Let us review some examples.  
A grocery shop has hundreds of items on its shelves and if it is a super market, it has thousands 
of items. A restaurant will have the menu card that runs to a few pages and each page may have 
10 to 20 items. Thus, has a few hundred of items. A beauty parlor offers many treatments for the 
customers. 
In spite of such large number of items, the business person needs some quick and easy way of 
checking the progress of the business or plan corrective actions. How does one do it?  
Content 
? Unit of sale, Unit cost, Unit 
price for multiple products 
? Break even analysis for 
multiple products or 
services 
? Importance and use of 
cash flow projections 
? Budgeting and managing 
of finances 
? Computation of working 
capital 
? Inventory control and EOQ 
? Return on Investment (ROI) 
and Return on equity (ROE) 
 175 
Defining the unit of sale, unit price and unit cost & resultant gross profit in a meaningful way is 
the answer. Let us see how! 
In the examples used above, we all know that a customer does not buy all the items from the 
grocer at a given time, nor does he/she order all the items on the menu when visiting a 
restaurant. A customer coming to the beauty parlor does not avail of all the offered services. 
Neither do all customers buy or order or avail of same items or services. If this be the case, and 
it is, how does the business owner figure out what is going on in his/her business? 
This is when ?averages? come in to play and help the business owner. 
Let us take the example of a grocery store. Observe the process, as it will be applicable to many 
similar situations. Each customer coming in to buy things will have different requirements. 
This, then results in the ?billed amount? (or invoiced amount) being different for different 
people. For example, at the end of the day, the shop keeper found out the following. 
Number of customers Per customer billed amount (`) Total billed amount (`) 
5 500 2,500 
10 700 7,000 
15 1,000 15,000 
10 1,450 14,500 
25 2,000 50,000 
5 2,500 12,500 
10 3,100 31,000 
15 3,500 52,500 
5 5,000 25,000 
Total Weighted  Average Total 
100 2,100 2,10,000 
 
In other words, 100 customers bought items worth ` 2,10,000/- , thus giving an average of  
` 2,100/- per customer. You would notice that no one bought items worth "exactly" ` 2,100. 
However, the collective purchase by all of them yielded this average we arrived at. It is 
conceivable that on another day the average could be different. In a month, the average (derived 
on a daily basis) at the beginning of the month could be higher than towards the end. If the 
average is arrived for all the customers in a month then that could give a more realistic picture 
as the sample (total customers) would be larger. 
In this particular case, ?Customer? is the ?unit of sale? and the average purchase made by one 
customer (not the actual bill but total billed amount divided by total number of customers) is 
the "Unit Price". Taking the same example, the Unit Price per Customer (or per Unit of Sale) 
would be ` 2,100/-. 
 176 
In the case of a restaurant, the ?unit of sale? would be a ?Diner?. This is different from the 
person who pays the bill. A group my consist of 10 people or 5 or 2. At times it may even be 
one. In each case, the number of persons paying the bill would most likely be one. So it is more 
accurate to go by the number of ?Diners?. The ?Diner? is the ?Unit of Sale? and the average 
amount billed per ?Diner? would be the ?Unit Price?. In the case of a restaurant that provides 
only Buffet Lunch or Dinner, life is simple. It is like a single product business. 
You can now visualize how a beauty parlor or saloon can also use the same concept. The 
?Customer? is the ?Unit of Sale? and average billing per customer is ?Unit Price?. 
So we have understood Unit of Sale and Unit Price in multi product environment. What about 
Unit Cost. 
As you would recollect from your earlier study, unit cost refers to variable cost (also referred to 
as cost of goods sold). How do we calculate the unit cost in the case of multi product or service 
situations? If we understood the way we calculated the unit price, it should give us a clue. Let 
us take the grocery store again. 
Grocery store is a Trading Business. One buys and sells. So, the cost at which the items are 
purchased is known (just as its MRP at which you are selling). Therefore, at the end of the day, 
it is possible to know the purchase price of all the items and quantities that were sold. Let us 
suppose that it works out to ` 1,70,000/-. There were 100 units of Sale. So the unit cost is  
` 1,700/-.  
In some cases, there could be another way. For every item, if the purchase price is 80% of selling 
price, then in that particular case, the Unit Cost would be ` 1,680/- (= 80% of ` 2,100/-). 
Gross Profit would then be ` 400/- per unit of sale (` 2,100 - ` 1,700) in the first case and  
` 420/- per Unit of sale (` 2,100- ` 1,680) in the second case. This will depend on the industry 
specifics. 
Many industries have their unique thumb rules for the relationship between Unit Price and Unit 
Cost. In Fast Moving Consumer Goods Industry it could be 80 or 85% (cost as percentage age of 
selling price). In food industry, it could be 30 to 35% (COG as percentage age of selling price). 
Electronic items may have a different thumb rule. Where none exists, you may be able to 
develop your own. However, the more accurate way is to actually compute the costs as 
explained. 
An exercise 
A stationery store sold in one day the following items at the prices indicated. 
Products Price per unit (`) Quantity sold 
Student note book 40 35 
Reynolds pens 40 40 
Erasers  5 5 
 177 
Scale (12? plastic)  15 10 
Flip chart 10 5 
Sketch pens (one DOZEN) 25 3 
 
The shopkeeper also found out, based on the number of bills issued by him, that there were 50 
customers. If customer is the unit of sale, what is the ?Unit Price? in this case? If the cost of each 
stationery item is 75% of its selling price, calculate the ?Unit Cost? and the ?Gross Margin? per 
unit of sale. 
Exercises for practice 
Illustration 1: Beauty parlor 
A Beauty parlor had varying number of customers during 5 weeks. This information and the 
total weekly billing are in the following table. What are the ?Unit of sale? and the ?Unit Price? 
in this case? If the cost of goods sold or variable cost is 60% of the sale price, calculate the ?Unit 
Cost? and the ?Gross Margin? per Unit of Sale. 
Week # No. of customers Total amount  
billed (`) 
Average amount billed  
(`) per customer 
Week 1 10 1,000 100 
Week 2 17 1,445 85 
Week 3 13   923 71 
Week 4 22 5,082 231 
Week 5 18 3,150 175 
Total 80 11,600  
 
Illustration 2: Restaurant 
Number of people who took their meals and the total billing for each of the 5 weeks is in the 
following table. What are the ?Unit of sale? and the ?Unit Price? in this case?  If the variable 
cost is 50% of the sale price, calculate the ?Unit Cost? and the ?Gross Margin? per Unit of Sale. 
Weeks No. of people  
taking meals 
Total amount billed (`) Average amount 
billed (`) 
Week 1 120 18,000 150 
Week 2 60 12,300 205 
Week 3 70 10,220 146 
Week 4 80 17,680 221 
Week 5 90 21,600 240 
Total 420 79,800  
 178 
Some formulas:  
1. Unit Price per customer =  
Total Billed Amount
Number of Customers
  
2. Unit Cost perproduct = 
Total Sale
Number of Unit Sold
  
3. Gross Profit = Selling price per unit-cost price per unit 
Break even analysis 
(Multiple products or services) 
We have understood the meaning and importance of & method of determining breakeven Point 
in our earlier lesson (Std XI). That related to single product or service business.  
Just to recap, breakeven point is the level of sales (or revenue generated) that equals all the 
expenses required for generating that revenue. It is not more than the expenses (i.e. no profit) 
nor is it less than the expenses (i.e. no loss). In other words there is neither loss nor profit. 
At the breakeven level 
Total revenue = Total expenses 
(Qty x Unit Price) = (Qty x Unit Cost) + Fixed Exp 
Qty x (Unit Price – Unit Cost) = Fixed Exp 
Qty x Gross Margin (or Profit) per Unit = Fixed Exp 
 B.E. Qty for a single product =  
Fixed expenses 
Selling price per unit – variable cost per unit 
B.E. quantity for multiple products  
Fixed expenses 
Weighted average selling price per unit – Weighted Average variable cost per unit 
Please note: Gross margin and gross profit are one and the same. 
Usefulness of break–even analysis continues to be the same whether you are operating a single 
product or multiple product business. It helps in setting profit goal and sales target. In a 
manufacturing environment, it helps in determining the products that are not contributing to 
meet the fixed expenses and thus brings up the item for discussion in management meetings 
about its continuity. 
Sales mix break-even point calculation 
Sales mix is the proportion in which two or more products are sold. For the calculation of break-
even point for sales mix, following assumptions are made: 
1. The proportion of sales mix must be predetermined. 
2. The sales mix must not change within the relevant time period.