![]() This will give you the average per-unit value of the inventory of goods available for sale. In this sense, compute it as cost of goods available for sale divided by the number of units available for sale. It is also a method for valuing inventory. In accounting, to find the average cost, divide the sum of variable costs and fixed costs by the quantity of units produced. Furthermore, production economies of scale can lower the threat of new entrants (competitors) into the industry. The more output that is produced, the more thinly spread the fixed costs of production across the units of output are. Up to a certain point, more production volume reduces the cost per unit of production. The minimum efficient scale is scale of production at which average cost of production reaches its minimum point. The point of intersection between the isoquant and isocost lines is the point of cost minimization. In addition, the isocost line represents all possible combinations of production variables that add up to the same level of cost. In economics terminology, the isoquant line is the line that represents all different combinations of production inputs that produce the same quantity of output. This mix occurs at the point of tangency between the isoquant and isocost lines. Example: The total cost of manufacturing salt is 1,000. To calculate variable cost, we subtract the fixed cost from the total cost. It changes with an increase or decrease in the amount of goods or services produced or sold. The cost-minimizing mix is the lowest cost input-output production mix, or the point at which a company can produce the most output for the least cost. A variable cost is a corporate expense that changes in proportion to production output. Companies with a lower average cost per unit of production are better able to defend against aggressive price-cutting among industry competitors than companies with a higher average cost per unit of production. The company also wants to determine the cost-minimizing mix and the minimum efficient scale. Use the following formula to calculate average cost per unit:Īverage Cost Per Unit = Total Production Cost / Number of Units Produced MinimizationĪ company producing goods wants to minimize the average cost of production. ![]() It also smooths out fluctuations caused by seasonal demand changes or differing levels of production efficiency. Especially over the long-term, average cost normalizes the cost per unit of production. Average cost per unit of production is equal to total cost of production divided by the number of units produced.
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