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If they need additional fixed cost due to increase in demand etc., companies can analyze what should be production quantity, so that the fixed cost addition will not shoot up their average total cost.

Companies can see what is the optimal point of production for them and what is the level of production which minimize their cost.

Few relevant uses of average total cost formula are : The company can use this concept of average total cost to analyze various aspects of their production and can utilize their resources in more efficient manner.

This is because of a decrease in margin productivity and a return of the additional resource we are adding.

But due to diminishing marginal return, the variable cost after a particular point will start increasing. Also, we have seen that as the production increases, the total cost will drop because of spreading of the same fixed cost over more units now. Relevance and Uses of Average Total Cost FormulaĪs explained above, the average total cost will give us an idea of what is the per unit cost a company will incur to produce stipulated number of units of goods. I will elaborate that will the help of an example: Average Total Cost Formula – Example #3 This is the reason that Average total cost curve is U Shaped curve. This is because of the concept of diminishing marginal return which states that after some point, adding an additional factor of production will result in a smaller increase in output. But now the catch is that this decline will not continue forever and after a certain level, the average cost starts to increase. But as we keep on increasing the quantity, average costs start to decline. This is because that fixed cost is now spread over 2000 units and per unit fixed cost is lower as compared to an earlier scenario.įor small quantity of output, as explained earlier, the total cost is higher. So if you see here, as we increase the number of cars, the average total cost per car dropped. Now, if we increase the number of cars, fixed cost will not change and only variation will happen in the variable cost Total variable cost per car is calculated as: all are fixed cost since these costs does not have direct linkage with the unit produced. But costs like plant, assembly line, equipment, R&D etc. all are variable costs because all of these costs will vary as per the number of cars the company is producing. So for them, costs like Steel, glass screens, number of tires, car seats, engines etc. Total Cost = Fixed cost + Total Variable CostĪverage Total Cost is calculated using the formula given belowĬompany ABC Inc.is working in manufacturing/assembling of Cars. Total Cost is calculated using the formula given below Total Variable Cost = Variable Cost per Pack * Number of Packs

Total Variable Cost is calculated using the formula given below The company is producing 1000 on an average. Fixed Cost which they have invested in equipment etc. Suppose there is an FMCG company which is producing candy for kids.

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You can download this Average Total Cost Formula Excel Template here – Average Total Cost Formula Excel Template Average Total Cost Formula – Example #1 Let’s take an example to understand the calculation of Average Total Cost formula in a better manner. Examples of Average Total Cost Formula (With Excel Template) So as the unit produced keeps on increasing, per unit fixed cost will drop so as the average total cost. This cost is not related to how many unit businesses is going to produce. This due to the fact that when a business will start its production, they have to incur certain fixed cost like buying machinery, equipment etc. Total cost = Fixed cost + Total variable costĪverage total cost, during the initial stages of production, will be higher and will go down as we increase the number of units produced. It includes both Fixed cost (one time cost which is required to produce the goods but does not change with the output) and Variable cost (per unit cost to produce the goods which change as per the output) Here Total cost includes all the costs which are required to produce the goods. Average Total Cost = Total Cost of Production / Number of Units Produced

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