Formula to Calculate Average Variable Cost
Average Variable Cost refers to the variable cost of per unit of the goods or services where the variable cost is the cost that directly varies with respect to the output and is calculated by dividing the total variable cost during the period by the number of the units.
The formula is as per below:
Average Variable Cost (AVC)= VC/Q
Where,
- VC is the Variable Cost,
- Q is the quantity of output produced
The AVC can also be calculated in terms of the average total cost and the average fixed cost. It is represented as follows,
AVC = ATC – AFC
Where,
- ATC is Average Total Cost
- AFC is Average Fixed Cost
Calculation of Average Variable Cost (Step by Step)
In order to calculate the AVC, use the following steps:
- Step 1: Calculate the total variable cost
- Step 2: Calculate the quantity of output produced
- Step 3: Calculate the average variable cost using the equation
-
- AVC = VC/Q
- Where, VC is variable cost and Q is the quantity of output produced
In certain cases, average total costs and average fixed costs are given. In such cases, follow the given steps
- Step 1: Calculate the average total costs
- Step 2: Calculate the average fixed costs
- Step 3: Calculate the average variable costs using the equation
-
- AVC = ATC – AFC
-
- Where, ATC is Average Total Cost and AFC is Average Fixed Cost
Examples
Example #1
The total variable cost of a firm is $50,000 in a year. The number of units produced is 10,000. The average total cost of a firm is $40 while the average fixed cost is $25. Calculate the average variable cost.
Solution
Use below given data for the calculation.
The calculation can be done as follows-
- = $50000/10000
Calculation can be done as follows:
- = $40 – $25
- The AVC is $15 per unit.
Example #2
An Economist in Bradleys Inc. is looking at the cost data of the company. Calculate the average variable cost for each output level.
Here is the cost data
Solution
The AVC is calculated in the following table for each output level using AVC = VC/Q
Calculation can be done as follows-
- =40/1
Similarly, we can calculate the AVC as follows
Example #3
Georges Inc. has the following cost data. Calculate the average variable cost for each output level. Also, determine the output level at which the average cost is the minimum.
Solution
The AVC is calculated in the following table for each output level using AVC = VC/Q.
The calculation can be done as follows-
=50/1
- Similarly, we can calculate the AVC as follows
The lowest AVC is 24.17 per unit. It corresponds to an output level of 6 units.
Hence, the output at which the average variable cost is the minimum is 6 units.
Example #4
Lincoln Inc. gives you the following financial information. You are required to calculate the average variable cost for each output level.
Solution:
Step 1:
We have to use the AVC Formula i.e = Variable Cost/Output
For this purpose, insert =B2/A2 in cell C2.
Step 2:
Drag from cell C2 up to cell C10
Relevance and Uses
Initially, as output increases, the average variable cost reduces. Once the low point is reached, the AVC starts rising with rising in output. Hence, the average variable cost curve is a U-shaped curve. This implies that it slopes down from left to right and then reaches the minimum point. Once it reaches the minimum point, it starts rising again. An AVC is always a positive number. At the minimum point, the AVC is equal to the marginal cost. Let us use an illustration to find out the behavior of the AVC.
In the above illustration, the average variable cost is at $5,000 per unit if only 1 unit is produced. Then it is on a declining trend up to the production of 6 units. It reaches its lowest point at $2400 per unit when 6 units are produced. Then, it is on an increasing trend, making it a U-shaped curve.
The AVC is used to make decisions as regards when to shut down production in the short-run. A firm can make a decision to continue its production if the price is above AVC and covers some fixed costs. A firm would shut down its production in the short run if the price is less than AVC. Shutting down production will ensure that additional variable costs are avoided.
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