Average cost

The average cost, also known as unit cost, are the ratio of the total cost and the quantity produced. It is an important measure in business administration.

• 3.1 General
• 3.2 Short-and long -term significance

• 4.1 graphics
• 4.2 explanations

Introduction and calculation

To calculate the total costs are summed up the variable and fixed cost components as follows:

With the help of which one can now calculate the average cost as follows:

An increase in the amount of produced results in a change of the variable average cost and, consequently, the whole average cost. The pitch level depends on the variable factors of production process and its costs. Average costs in doing so are closely related to economies of scale. " The greater the number of units in a company, the lower the average cost. " This relationship describes increasing returns to scale.

So basically give the average cost to the cost of production per unit.

Classification

Total average cost (TDK )

As a total average cost is defined as the costs incurred per unit produced in full scale, ie the sum of the fixed and average variable costs. They are derived by dividing the total cost by the associated application.

Fixed average cost ( DFK )

Fixed costs also arise if it is not produced. They are completely neutral with respect to the output, which means that they do not change with the variation of the output quantity, so stay the same. To calculate the average fixed cost, fixed costs are divided by the reference value.

" Since the fixed costs are constant, decrease the average fixed cost when the output rises. " Consequently, one can say, the larger the output quantity is, the minimum, the average fixed costs. " This relationship is referred to as economies of scale. The so-called law of mass production describes the regressive course of the unit cost per piece. "

Average variable cost ( DVK )

The total average variable cost is obtained on the one hand, by subtracting the fixed cost per unit of the total cost per piece.

Another way to calculate the average variable cost is the variable cost by dividing the freight emissions.

They are dependent on the quantitative output. An increase in the application rate leads to a change of the variable average cost. In this case, you can not say clearly whether the quantitative increase in output leads to an increase or a decrease in the average variable cost.

Example: If a machine is installed and set up these costs fall on the first production unit. For every additional unit, these costs no longer apply. Increase the variable costs will be only the low energy costs and the materials used. Thus, the variable costs decrease with the first units produced. If now finally reached the optimum speed, the variable cost per unit will increase. The reason for this is the wear and tear of the machine by the speed and increased waste.

This relationship is also evident in the graph.

The importance to the company

Generally

Average cost to serve as an information base for the pricing policy and quality control of the enterprises. Since in the production of goods incurred costs, companies must try to cover this with the selling price and to exceed where appropriate. Here, the size of the contribution margin of great importance. " The contribution combines the cost thinking with the sales thinking. The starting point is the net revenue of a product. This net proceeds are compared to the variable costs of the product. "With the help of this size, one can judge the extent to which the company is able to cover the fixed costs. If the price accordingly as great per unit produced is like the average variable cost, contribution margin is equal to zero. In this situation, the company generates neither a profit nor a loss. If the price is below this cost, this leads to a negative contribution margin and thus to a loss. A profit is only generated if the unit price on the variable and the fixed average cost is. It is not enough to generate a positive contribution margin. In this case, only the variable costs are covered, and the company would cause a loss equal to the fixed costs on long-term level. Consequently, the total average cost must be covered if a profit is to be generated.

To be able to assess whether and how much is produced, the average cost is a very important parameter. But the division into short and long term is of importance here. Those costs significantly, which causes the production of an additional unit of the good - " but for the offer of the entrepreneur - this is demonstrated in the context of profit maximization. These costs are referred to as marginal costs or marginal costs ( GK). "

The comparison of the marginal cost with the variable and total average costs for a proper decision of a company which would withstand the competition in the market is critical. This is illustrated again by the graphical representation in bullet 4. Based on this comparison, the company can find out what effect each further unit or any lesser amount to the contribution margin and profit. But what effects a variation in price on these two important variables. Consequently, the company can use its monitor their progress and make optimal decisions about the price.

Short-and long -term significance

On short-term level, a contribution margin of at least zero must be earned. This means that the price covers the costs or the difference between the price and the cost is at least zero. Consequently, it is sufficient if the average variable costs are covered. In the long term, it is necessary that not only the variable but also the fixed costs are covered. The company has to cover the sale of products or the output produced at least the total average cost or at best over-compensate when the operating core and get the corporate existence is not to be jeopardized. Would a long-term contribution of zero generates, the company would cause a loss equal to the fixed costs. Accordingly, a long-term survival would be excluded on the market. If the operating parameter optimally meet the short-term to long-term average cost. "Not always all factors of production are variable in the short term. One factor may just be adaptable over the long term. "So the short-term average cost is at a non- optimum farm size over the long term, as opposed to the short period, all the long-term costs are variable.

Graph

Graphic

In the following, related to the case of short term graphic, the marginal costs are presented in the context of the total and average variable cost.

Notes

In operation a minimum, the minimum of the average variable cost ( DVK ) is mapped. If the product price ( revenue per piece ) shall be set at the level of average variable costs, it generates in this volume a contribution margin of zero. The revenues from the associated production volume ranging from only to cover their total variable costs, but not the ( operational ) fixed costs. The setting for this price is referred to as short-term price floor, because it is not possible for a company in the long run, not to cover its fixed costs.

Below the point that generate a negative contribution margin is shown. The price is below the operating minimum. The average costs are not covered in this case the market price. Thus, this means that for every unit produced a loss is generated and it would be even more beneficial for the company, not to produce (because then at least the variable costs were not incurred ). A company with such a situation should cease the production costs consequently.

The minimum of the total average cost is referred to as operating profit or as an optimum threshold. At this point, the first time all production costs can be covered. If the price is equal to this minimum, the company can exist in the long term in the market. The price covers the total average costs. On short-term as well as long-term level, no loss is generated from this point. There will be a breakthrough of the loss zone to the profit zone. For these reasons, this point is called the long-term price floor, where a company in the long term, of course, cover not only the costs, but also want to make a profit.

If the price is between the operating minimum and the optimum operation is generated in the company a positive contribution margin. This space is called the contribution margin lens. Nevertheless, the price is not sufficient to cover the entire cost enough, because in this situation, the average variable costs are only covered. Nonetheless, it is recommended in the short term to produce. If the production would be adjusted, the company would lose the positive contribution margin. In such a situation, the loss would be even greater.

The best option for a company seen above. The price here is about the long-term price floor. In this case, the company not only generated a positive contribution margin, but also a profit. This section of the presentation is called profit lens. All costs are covered.