Imagine you own a bakery that makes cakes. To bake sweet treats, you need different ingredients. These include flour, sugar, eggs, electricity for the oven, etc. The costs vary depending on how many cakes you decide to make.
In the economic jargon, these are called variable costs, and they change with the number of cakes you bake.
But because these could vary based on the volume you bake, it makes sense to average your variable costs to better understand how to price your sweet bakery treats.
A calculator designed for average variable costs helps you to project potential costs quickly and can be a helpful tool when it comes to adjusting production plans or considering how scale changes might affect your business.
Average Variable Cost Definition
Average variable cost (AVC) refers to the total variable costs of production divided by the quantity of output. Variable costs are expenses that change proportionately to a business’s activity, such as raw materials, direct labor, and electricity.
Calculation Formula
To calculate AVC, you can use the following formula:
AVC = Total Variable Costs / Produced Quantity- Total Variable Costs: These include costs that vary with the output level, such as materials, labor, and utilities.
- Produced Quantity: The number of units produced or services provided.
Real-Life Example Calculation
For example, if your bakery spends $200 on raw ingredients, salaries and additional $50 on energy to bake 150 cupcakes, the calculation would be:
AVC = ($200 + $50) / 150
AVC = $1.67 per cupcake