How this calculator works
Average variable cost divides the costs that change with output by the number of units produced. Labour, materials and energy are typical variable costs; rent and salaried management usually are not. The result is the variable cost of the marginal unit only in the special case where average variable cost is constant. More often average variable cost falls at low output as fixed overhead is spread over more units and then rises as capacity tightens. Comparing average variable cost with price shows whether the firm covers the cost of staying open in the short run.
Formula
Average variable cost = variable cost / output. Variable cost = average variable cost × output. Output = variable cost / average variable cost.
Worked example
Variable costs of $50,000 at an output of 10,000 units give an average variable cost of $5.00 per unit. At double the output with the same total variable cost the average would fall to $2.50, which is the usual spreading effect before diminishing returns appear.
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Frequently asked questions
What is the difference between AVC and ATC?
Average total cost adds average fixed cost to average variable cost. Fixed costs do not change with output, so they per unit fall steadily as output rises. Average variable cost ignores fixed costs entirely.
Why does average variable cost matter for shutting down?
In the short run a firm with no alternative use for its fixed assets should keep producing while price covers average variable cost. Below that point every unit sold adds to the loss, so shutting down is cheaper.
Is marginal cost the same as average variable cost?
No. Marginal cost is the change in total cost from one more unit. It crosses average variable cost at the minimum of the average curve. The two are equal only where the average is flat.