Average Variable Cost Calculator

Average variable costs are the production cost per unit, calculated by taking into account only those costs that change in relation to the volume of production. Dividing total variable factor costs by the volume of production gives the cost per unit for materials, labor and other resources that increase or decrease with the volume of production.

This calculator allows you to determine this value and vice versa. Two out of three values (total cost for variable factors, production volume, average variable costs) are entered in order to calculate the third value. If fixed costs and sales price is activated, then average total costs, break-even point and whether short-term continuation of production makes sense can also be analyzed.

What are average variable costs?

Average variable cost (AVC) is the variable costs a company incurs for each unit produced within a given time period. It represents the costs that change with the volume of production.

Variable costs increase as production volume increases and decrease when the production volume decreases. Examples include raw materials, direct labor, packaging, shipping, sales commissions, and energy consumed during production. Fixed costs are the opposite. Because rent, insurance, and salaried employees remain the same whether one unit or ten thousand units are produced, they are not included in AVCs.

A complete example.

A coffee shop spends $15 on coffee beans, $4 on milk and sugar, and $26 on the wages of its hourly staff each month, and serves 20,000 cups of coffee. If variable costs are $45, then average variable cost is equal to:

The variable cost per cup of coffee, not including fixed costs like rent, is approximately $1.50.. If the selling price per cup is below $1.50, then the coffee shop will lose money on each cup sold. If the selling price is above $1.50, then each cup contributes to covering the fixed costs.

You can even calculate the Break-even point as follows:

How to use this calculator:

Divide your total variable cost by your production volume to determine the average variable cost per unit.

Enter two of three fields and leave one blank, the calculator will automatically calculate the missing value.

If you enable fixed costs, additional information will be shown such as average fixed cost, average total cost, total cost and a breakdown of the costs.

When you enable the selling price, you can view the contribution per unit, the contribution margin, the production quantity to break even point and a short-term idle check.

In the section on cost analysis, you'll find graphs of cost curves and tables for various production quantities.

Short-term cost structures

Average variable cost (AVC) is one of several interrelated cost indicators. While marginal costs examine the changes that occur from producing additional units, all other indicators are calculated by dividing total costs by the quantity produced.

Average fixed costs decrease with increasing production quantity, so average total cost is always higher than average variable cost. However, the two values become closer as the production quantity becomes larger. The gap between the two lines corresponds exactly to the average fixed cost.

List of variables:

Why average variable costs are important:

Average variable costs (AVC) are a real-world indicator, not just a theoretical concept. They form the floor for pricing and serve as the basis for planning the break-even point.

• Pricing: When price exceeds AVC, then each product sold contributes to fixed costs and profit.

• Break-even point: To reach the break-even point, price must exceed average total cost, which is the sum of average variable costs and fixed costs.

• Rule for shutting down production: In the short run a firm should continue to produce as long as price covers AVC. Even if total cost is not covered temporarily, by producing the firm can at least pay its own variable costs.

• Efficiency: By comparing AVC at different output levels, the level of production where unit costs are lowest can be determined.

Why is the AVC curve u-shaped.

In economics textbooks the average variable cost (AVC) curve is typically drawn as U-shaped. At low levels of output the AVC falls because specialization of workers and more efficient use of plant and equipment increases the firm's efficiency. Above the optimum, however, unit costs rise due to factors such as overloading of plant, overtime for labour and rushed production of materials, so that AVC rises again.

This U-shape is due to the fact that variable cost per unit itself varies with volume of production. In the tables for this calculator and on the graph of cost curves, we have assumed that variable cost per unit is constant. This is suitable for a quick planning exercise and is a common way of presenting graphs. You can see how AVC remains at a constant level while average total cost falls towards AVC due to the fall in average fixed costs.

Tips for getting accurate results:

• Only calculate costs that change with the amount of production. Costs that do not change are fixed and will not be factored into the AVC.

• Use consistent time periods for your calculations. Use variable costs and production volume for the same week, month or quarter.

• Check AVC at different production levels. This is better suited for comparisons than a single snapshot.

• To calculate the total cost per unit, you add average fixed costs to average variable costs to get average total costs.