What cost per unit is and why it comes out low

Cost per unit is what one sellable jar, bag, or can costs you to make. Every price you set is built on it, from your web price to the distributor's.

Most brands we talk to get the division right. Where it goes wrong is the cost on top and the count underneath.

Four lines go wrong more than any others:

• Freight. It comes on a separate bill, sometimes weeks later, so it never makes it onto the ingredient.

• Packaging. One layer gets left off. Usually it's the shipping case, or the jars that failed the seal check.

• Your time. It's in the sheet at $0, because you're not paying yourself wages yet.

• Yield. You divide the batch by the 100 jars the recipe promises, not the 96 that went into cases.

Each one is a few cents. Together they decide whether a distributor price pays you or costs you.

How to calculate cost per unit in five steps

The formula fits on one line:

Cost per unit = (ingredients + packaging + labor + production costs) ÷ sellable units

The math is easy. The work is filling in each term the right way.

1. Price every ingredient at landed cost

Landed cost is what you paid, plus what it cost to get it to your door. Freight-in on raw materials and supplies counts as cost of goods sold. That's straight from IRS Publication 334.

Then convert each purchase to the unit your recipe uses. So a 25 lb case of peppers at $48.75, plus $3.75 of freight, is $2.10 a pound landed.

When one freight bill covers several items, split it the way the carrier charged you. For most pallets, that's weight. Pick one method and stick with it.

If the freight bill comes in after the goods, add it the day it lands. The cost you meant to add later is the one that never gets added.

2. Count packaging down to the case

Go layer by layer. Start with the jar, lid, label, and shrink band, then the case you ship in. Each one has its own freight, too.

Charge packaging on every unit you filled, not just the ones you sold. A jar that fails the seal check still used up a jar, a lid, a label, and a band.

If you use a co-packer, some will ask for extra cans or film on top of the run to cover line loss. Whatever overage gets used is part of that batch's cost.

3. Put a rate on labor, including yours

Labor is hours on the batch times an hourly rate, for everyone on the line. That includes you.

If you're not paying yourself yet, cost your hours anyway. Use what you'd pay someone to replace you.

Ontario's guide for food manufacturers says to cost labor per unit "even if you are using unpaid labour" (Ontario food and beverage manufacturing guide).

Some of your labor is fixed per batch, like setup and cleanup. Some scales with each unit, like hand labeling. Cost each one the way it behaves, so a bigger batch spreads the fixed part.

4. Add the cost of the kitchen or the co-packer

If you rent a kitchen, this is the hours you booked, including the ones you didn't fill. Equipment rental and any utilities you pay per session go here too, as your production overhead.

If you use a co-packer, their tolling fee replaces your labor and kitchen lines. Any setup charge or minimum-run fee gets spread over that run's units.

Some co-packers buy the ingredients and charge you a flat price per jar. Then your cost is that price, plus the packaging you supply, plus freight in.

5. Divide by sellable units, not the recipe's count

You never get what the recipe says. Every run loses product to the kettle, the filler, the seal check, and the retention sample. So divide by the units that went into cases.

If the loss is steady, set your standard yield at the low end of what you usually get. So if a batch gives you 111 to 115 cases, plan on 111.

If it swings run to run, plan on your usual number and record what each batch made. A one-off, like a dropped pallet, gets written off that month. Don't fold it into unit cost.

Worked example: a 12 oz hot sauce

Say you make a 12 oz hot sauce in a rented commercial kitchen. The recipe is written for 100 jars.

On a typical run, about two jars' worth stays in the kettle and the filler. You fill 98.

One fails the seal check, and one goes on the shelf as a retention sample. That leaves 96 sellable jars, or eight cases of 12.

The batch cost

Cost per jar and per case

• Per jar, sellable units: $405.68 ÷ 96 = $4.23

• Per jar, if you divided by 100: $405.68 ÷ 100 = $4.06

• Per case of 12: $4.2258 × 12 = $50.71

The gap is 17 cents a jar. It doesn't sound like much, but on 10,000 jars a year it's about $1,700 of margin you thought you had.

From cost per unit to wholesale and shelf price

Now work forward from your cost. At each step, divide by one minus the margin that step needs.

1. Your price to a distributor, at a 40% margin: $4.23 ÷ 0.60 = $7.04 a jar, or $84.48 a case.

2. The distributor's price to a store, at a 25% margin: $7.04 ÷ 0.75 = $9.39.

3. The store's shelf price, at a 35% margin: $9.39 ÷ 0.65 = $14.45, which the store will likely round to $14.49.

Those splits sit inside the usual ranges. Montana's Department of Agriculture puts grocers at 33 to 50%, distributors at 20 to 30%, and brokers at 5 to 15% (Montana pricing guide).

The same guide puts your gross margin, as a specialty food brand, at 40 to 60%, and no less than 40%. Go below that and the price can't cover demos, promotions, distributor discounts, or you. Sources checked October 2026.

Margin vs markup

Margin is profit as a share of the selling price. Markup is profit as a share of cost. Mix them up on a price sheet and it costs you.

Say you multiply $4.23 by 1.40 and get $5.92. That's a 40% markup, but only a 29% margin. You're 11 points short of what you meant.

Food cost percentage is the same idea from the other side. Your $4.23 cost is 60% of the $7.04 distributor price.

Selling direct to stores

If you sell straight to some stores, charge them the distributor's $9.39. Undercut your own distributor and they'll notice.

You keep 55% on those accounts, but you also do the delivery, the invoicing, and the chasing. If you sell online as well, running Shopify, Faire, and wholesale from one count covers keeping those channels straight.

When the shelf price is too high

If $14.49 is more than your shelf will bear, work on the cost, not the margins. Every cent off the $4.23 takes about 3.4 cents off the shelf price.

Start with batch size, because a bigger run spreads the kitchen and setup labor further. Then look at jar price, then labor per jar.

Costs food brands leave out of cost per unit

These split two ways. Some go into cost per unit. Others belong in your price, but not in the unit cost.

In the unit cost

• Freight to your warehouse. Moving finished cases from a co-packer to your storage or 3PL is part of getting them into inventory, so add it to that run.

• Packaging overage. Extra cans, film, or labels a co-packer burns on setup.

• Price changes between deliveries. Two deliveries of the same ingredient rarely cost the same. The batch costs what the lots you used cost.

• Supplier credits. If a supplier overcharged you and sent a credit, take it off the cost of that delivery, not just off the bill.

In the price, not the unit cost

• Samples. Buyer and demo samples are marketing. Each is still a jar you didn't sell.

• Shrink. Product damaged or lost after it's made. Build the rate you usually lose into your price.

• Shipping to customers. Freight out is a selling cost. Work out web and wholesale shipping separately.

• Trade spend. Slotting, demos, and distributor promotions all have to fit inside the price, along with a fair wage for you.

Estimated vs actual cost per batch

The $4.23 is an estimate, built on your usual prices and your usual yield. You price from it. But every batch has an actual cost too, and the actual tells you whether the price still works.

Say peppers came in at $2.40 a pound landed instead of $2.10, and the kettle ran long, so you filled 95 jars and ended with 93 sellable:

• Ingredients: $134 + (40 lb × $0.30) = $146.00

• Packaging on 95 filled: $91.20 plus $5.70 of freight, and still eight cases at $6.72

• Batch total: $146.00 + $91.20 + $5.70 + $6.72 + $90 + $75 = $414.62

• Actual cost per jar: $414.62 ÷ 93 = $4.46

Each jar now costs 23 cents more. Your margin on the $7.04 distributor price drops from 40% to 37%, and no invoice warns you.

What to do with the gap

If one line runs over batch after batch, update the estimate. If a single batch is far off, find out why before the next run.

Re-base the whole estimate every quarter, or after a big price or recipe change. For a new product, check costs on every run until they hold steady.

If you carry a long catalog, price a little above your floor. That way one input moving doesn't mean repricing every product you sell.

Common cost per unit mistakes

• Pricing from the supplier's list price. The quote isn't what landed. Use the invoice plus freight.

• Leaving your own time out. The margin disappears the day you hire help.

• Dividing by the recipe's count. Use sellable units from your own runs.

• Treating markup as margin. A 40% markup is a 29% margin.

• Accepting a ladder that leaves you 20%. If the distributor's and the store's margins leave you at 20, change the price or the cost before you sign.

• Never checking the actual. An estimate you set once and never test drifts away from what each batch really costs.

How Peasy handles cost per unit

• Your recipe is a Template. Ingredients and packaging are Item inputs. Labor, kitchen rental, or scrap allowance are Cost inputs, Per unit or Per batch. The template shows unit cost and batch cost at current item costs.

• Yield lives on the template. Set it to the jars you really get, and the inputs scale when you plan a bigger or smaller run.

• Co-packers fit the same template. Turn on Made by a co-manufacturer? and enter their charge per output unit or per batch. With Include in COGS on, it rolls into the unit cost.

• Each batch is costed from the lots used. At Mark as Done on the Work Order, you pick a lot for each ingredient and enter the Qty Made. Peasy costs each input from its lot, freight included, and calculates the run's cost per unit.

• One run can differ from the plan. Change a labor line under Additional Batch Costs, or use Add Cost for freight to your 3PL. The template stays as it is.

• Margin sits next to price. In a Catalog's bulk pricing editor, you can show Margin % and Markup % beside each Sale price. Type a margin and Peasy works out the price.

Peasy is free, with no subscription and no cap on items, users, or orders. The creating templates guide has the steps.