Definition: Variable cost per unit is the cost for materials, labor, electricity anything that is associated with the output. To get the average variable cost we divide the total variable cost by the total output.
Variable cost is different from Fixed Cost as it can change with the output while fixed cost remains the same regardless.Generally variable cost decreases with small increases of production,then eventually the cost increases with large increases in production. This pattern is know as the U-shaped average variable cost curve. .
Generally if the price of the product is higher then the AVC, the company will stop production as they are losing money. If the price is higher then the AVC of the product and percentage then the production will continue.
Average Variable Cost formula: Total variable cost/ total units of output
How to calculate average variable cost
Let's say we have a company that produces Beds, we want to calculate the average variable cost for production, this will inform us if we should continue production at a specific level of output. Make a list of our variable costs and choose a time period, the company has variable costs of raw materials and direct labor. We create a list of the quantity, Total variables costs and average variable cost.
Average variable cost
Total Variable Cost
Average Variable cost
With this list we can see that AVC starts high but then begins to drop and then increasing again as the quantity grows, which is the U-shaped average variable cost curve. With this list it provides a basis to decide when you should halt production or continue in the short term.
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