Legal Definitions - average variable cost

Average variable cost refers to the cost directly associated with producing a single unit of a good or service, where these costs change based on the volume of production. It is calculated by taking the total variable costs incurred for a certain level of output and dividing it by the total number of units produced.

To understand this, it's helpful to distinguish between two types of costs:

• Fixed costs are expenses that do not change regardless of how much is produced (e.g., rent for a factory, salaries of administrative staff, insurance premiums).
• Variable costs are expenses that fluctuate directly with the level of production (e.g., raw materials, hourly wages for production workers, packaging).

Therefore, average variable cost focuses solely on the per-unit portion of expenses that increase or decrease as production volume changes, excluding any fixed overheads.

Examples:

• A Custom T-Shirt Printing Business:

  Imagine a small business that prints custom designs on t-shirts. In a particular week, they receive orders for 200 t-shirts. The costs directly tied to producing these 200 shirts include $1,000 for blank t-shirts, $200 for printing ink, and $100 for packaging materials. Their total variable cost for this week is $1,000 + $200 + $100 = $1,300.

  To find the average variable cost, they divide the total variable cost by the number of t-shirts produced: $1,300 / 200 t-shirts = $6.50 per t-shirt.

  This example illustrates that for each t-shirt produced, $6.50 represents the direct cost of materials and consumables that varies with the quantity printed, separate from fixed costs like the rent for their shop or the depreciation of their printing machine.

• A Bakery Producing Artisan Bread:

  A local bakery bakes 300 loaves of sourdough bread in a day. The ingredients for these loaves cost $300 (flour, water, salt, yeast), and the hourly wages paid to the bakers directly involved in making these loaves amount to $450. The total variable cost for the day's bread production is $300 + $450 = $750.

  The average variable cost per loaf is calculated as $750 / 300 loaves = $2.50 per loaf.

  This example demonstrates that the average variable cost of $2.50 per loaf covers the direct materials and labor that change based on how many loaves are baked, excluding fixed costs such as the rent for the bakery space or the salary of the bakery manager.

• A Freelance Content Writer:

  A freelance writer completes 10 articles for various clients in a month. For these specific projects, they incur costs such as $50 for stock images, $20 for a one-month subscription to a specialized research database, and $30 for a proofreading service. Their total variable cost for these 10 articles is $50 + $20 + $30 = $100.

  The average variable cost per article is $100 / 10 articles = $10 per article.

  This example shows how the average variable cost of $10 per article represents the direct expenses that arise only when an article is produced, distinct from the writer's fixed costs like their computer, internet service, or general office supplies.