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Simple English definitions for legal terms
average variable cost
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A quick definition of average variable cost:
Average variable cost is the cost per unit of output, which is calculated by dividing the total cost (fixed cost and variable cost) by the output. It is the cost that varies with the level of production. For example, if a company produces 100 units of a product and incurs a total cost of $1000, then the average variable cost per unit would be $10. This cost includes the cost of materials, labor, and other variable expenses. It is important for businesses to calculate their average variable cost to determine the profitability of their products and make informed decisions about pricing and production levels.
A more thorough explanation:
Definition: Average variable cost is the cost per unit of output, which is calculated by dividing the total cost (fixed cost and variable cost) by the output. It is the cost that varies with the level of production.
Example: Let's say a company produces 100 units of a product. The total cost of production is $1000, which includes $500 of fixed cost and $500 of variable cost. The average variable cost would be $5 per unit, which is calculated by dividing the variable cost ($500) by the output (100 units).
Explanation: The example illustrates that the average variable cost is the cost that varies with the level of production. In this case, the variable cost is $5 per unit, which means that the company has to spend $5 for each unit produced. As the level of production increases, the variable cost per unit may decrease due to economies of scale.