The following equation is used to calculate an average variable cost.
Average Variable Cost Definition
An average variable cost is a ratio of a business or entity’s total variable costs divided by the quantity of of output.
In short, this is a means to analyze how changing costs in things like labor, raw material, utilities, ect. affect the total output a certain manufacturing plant or business can achieve for any given product.
The following is an example problem of calculating the average variable cost.
- First, determine the total amount of the variable cost. For this example we will say the total variable costs are $10,000.00.
- Next, determine the total output at this variable cost. For this example it’s determined the total output is 5,000 units.
- Finally, calculate the average variable cost using the formula presented above. So, $10,000.00/5,000 = 2.
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