Average Variable Cost

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
Average-Variable-Cost-Formula

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For eg:
Source: Average Variable Cost (wallstreetmojo.com)

Where,

The AVC can also be calculated in terms of the average total cost and the average fixed costFixed CostFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more. 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)

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

You can download this Average Variable Cost Formula Excel Template here – Average Variable Cost Formula Excel Template

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.

  • Variable Cost: $5000
  • Quantity (Q): $10000
  • Average Total Cost(ATC): $40
  • Average Fixed Cost (AFC): $25

The calculation can be done as follows-

Average Variable Cost Formula Example 1.1
  • = $50000/10000
Average Variable Cost Formula Example 1.2

The calculation can be done as follows:

Example 1.3
  • = $40 – $25
Average Variable Cost Formula Example 1.4
  • 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

OutputTotal Variable Cost ($)
140
270
395
4110
5145
6200
7300

Solution

The AVC is calculated in the following table for each output level using AVC = VC/Q

The calculation can be done as follows-

Example 2.1
  • =40/1
Average Variable Cost Formula Example 2.2

Similarly, we can calculate the AVC as follows

Example 2.3

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.

OutputTotal Variable Cost ($)
150
275
395
4110
5125
6145
7175
8225
9300
10420

Solution

The AVC is calculated in the following table for each output level using AVC = VC/Q.

The calculation can be done as follows-

Average Variable Cost Formula Example 3.1

=50/1

Example 3.2
  • Similarly, we can calculate the AVC as follows
Example 3.3

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 six units.

Example #4

Lincoln Inc. gives you the following financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more. You are required to calculate the average variable cost for each output level.

OutputTotal Variable Cost ($)
15
27
310
412
514
617
722
830
950

Solution:

Step 1:

We have to use the AVC Formula i.e., = Variable Cost/Output

Average Variable Cost Formula Example 4.1

For this purpose, insert =B2/A2 in cell C2.

Step 2:

Drag from cell C2 up to cell C10

Average Variable Cost Formula Example 3.4

Relevance and Uses

Initially, as output increases, the average variable cost reduces. Once the low point is reached, the AVC starts rising with rising output. Hence, the average variable cost curve is a U-shaped curve. It implies that it slopes down from left to right and then reaches the minimum point. Once it reaches the minimum mark, it starts rising again. An AVC is always a positive number. At the minimum mark, the AVC is equal to the marginal cost. Let us use an illustration to find out the behaviour of the AVC.

OutputAverage Variable Cost ($)
15000
23800
33200
42750
52550
62400
72500
82800
93350
104300

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 six 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 decide 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.

Recommended Articles

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