On a balance sheet, unit sales represent the total sales of a product within a specific period. This crucial metric is used to determine the optimal price point to achieve profitability given the actual cost of production.
Key Takeaways
- Unit sales assist in pinpointing the ideal price point for a product based on manufacturing costs.
- These sales are reviewed over different accounting periods such as monthly, quarterly, or annually.
- Forecasting future unit sales involves multiplying the anticipated number of units sold by the unit selling price.
Making Sense of Unit Sales
Unit sales are reflected on a company’s income statement and are assessed over diverse accounting periods—be it monthly, quarterly, or yearly. This figure aids companies in determining the correct price point for their products.
Analyzing unit sales can signal if a product is experiencing margin pressure. For instance, if a company, let’s name it XYZ Corp., reports $250 million in revenue and has sold 5 million units, this results in an average selling price (ASP) of $50 per unit ($250 million/5 million). If during the next reporting period the ASP drops to $48, it could be an alarming sign for the company.
Reviewing annual unit sales helps industry analysts decide if a company is advancing in a positive direction. In 2021, Tesla recorded sales of 936,000 electric vehicles, a noteworthy 87% increase from 2020. Tesla reported selling 308,600 units in the final quarter of 2021 alone.
Recent production challenges, due to the COVID-19 pandemic beginning in 2020, heavily impacted car manufacturers. Nevertheless, Tesla’s CEO managed to bypass semiconductor shortages by adopting new chip designs and updating software.
Unit Sales and Production Metrics
The break-even point is the production level where the cost of producing one unit equals the revenue generated from that unit—indicating no profit or loss.
Given the unit production costs, prices are often adjusted to ensure at least a break-even point is met. Any revenue generated per unit beyond this break-even point is considered profit.
Companies also study the marginal cost, which is the change in total production cost attributed to producing one additional unit.
During production, companies often take into account economies of scale—cost benefits that arise when production becomes more efficient. These can be achieved by increasing production and distributing costs over a larger volume of goods. Costs can be fixed, such as insurance and licenses, or variable, such as packaging supplies.
Forecasting Unit Sales
Companies frequently predict future sales by multiplying the anticipated number of units to be sold by the unit-selling price.
Analyzing past financial results—such as profit and revenue—reveals patterns that help companies make reliable predictions about future sales. With a clear understanding of production costs, referred to as the cost of goods sold (COGS), a company can refine its projections.
For example, anticipate a major company’s future unit sales using past data. Tesla, with projected first-quarter U.S. sales of 110,000 vehicles, has been leading the luxury segment with soaring demand outpacing supply. Amidst ongoing factory expansion, Tesla’s global annual production is expected to rise from around 1 million vehicles in 2021 to roughly 2 million by 2023, according to analysts.
Contrarily, starting in 2018, Apple stopped reporting unit sales numbers in its earnings reports. Apple executives decided that the number of units sold per period didn’t necessarily reflect the business’s underlying strength. Rather than clarifying insights into their business, unit sales were deemed a distraction from more critical data.
Exploring Sales Revenue
Sales revenue equals the total number of units sold multiplied by the average price per unit.
Differentiating Between Unit Sales and Sales Volume
Sales volume refers to the number of units sold during a specific accounting period such as per month or year.
Understanding Accounting Methods: LIFO and FIFO
LIFO (Last In First Out) and FIFO (First In First Out) are two distinct accounting methods for recording inventory. FIFO records the oldest units produced first, while LIFO records the most recently produced units first.
Summary
Unit sales data on a balance sheet reflect the actual number of products sold in a specific reporting period. Forecasting future and anticipated sales involves multiplying projected unit sales by the unit selling price. Analyzing unit sales trends over such periods assists industry experts in determining if a company is progressing positively.
Related Terms: revenue, margin pressure, break-even point, marginal cost.
References
- Deutsche Welle. “Tesla Posts Sales of Almost 1 Million Cars In 2021”.
- AutoNews Europe. “Musk Commits to 2023 Tesla Cybertruck Launch”
- Apple Insider. “Five Reasons Why Apple Is Ending Unit Sales Reporting”.
