Blog 4 Marek Niesiobedzki

Good Morning Class !

             My name is professor Niesiobedzki and today I will be teaching you about Average Cost .

At first, I think it is very important to know what exactly is Average cost and what it consists of. The Average Cost –Production cost per unit of output, computed by dividing the total of fixed costs and variable costs by the number of total units produced (total output). Lower average costs are a potent competitive advantage. Also called unit cost. Formula: (Fixed costs + Variable costs) ÷ Total output.

 Example -Average Cost is AC=C/x. Basically, put your cost function on the numerator and divide it by the number of machines you produce.

[2000+100(250)-0.1(250)^2]/250

which equals $83.00 per machine for the first 250 machines

Average cost is used to find out how much does it cost to produce each individual unit which includes all of the costs including factory, utilities, front costs machinery etc.

Average cost is very important to know, the reason why it is important is because if you are ever to be in the manufacturing business, it is essential to know how much it cost to produce each unit and when to stop production in order to maximize profit.

Once again, I will propose an example on how to calculate the average cost

I have a watch factory. I produce limited production watches. My costs are

            Factory - 50 thousand dollars a year

            Workers – 100 thousand dollars a year

            Materials- 25 thousand a year

            Machinery- 200 thousand

            Utilities – 50 thousand a year

Each of my watches have a selling price of 20 thousand dollars each and will produce 40 thousand units

How to calculate my average cost per unit

325 thousand for my materials and costs a year

800 thousand dollars (  40k units x 20k dollars)

 Average cost  $2,461.53 per unit

$800,000

-----------                         = 2,461.53 average cost per unit

$325,000

           

Thank you class and if you have any questions please let me know and I will do further explanations.

Have a great day.

Now please calculate the average cost for firm B which produces signature rings.

Costs-  Facilities – 60 thousand dollars a year

Materials- 70 thousand dollars a year

Workers – 100 thousand dollars a year

Utilities – 7 thousand dollars a year

Machinery – 180 thousand dollars a year

Each ring will cost 2,000 dollars each and my company will produce 300,000 units per year , please calculate the average cost of each unit .

Answer key when done and to check your work

$417,000 total costs of production

$600,000 sales revenue

$600,000/ $417,000 = Average cost per unit $1.4388

Sources :  http://www.businessdictionary.com/definition/average-cost.html#ixzz3XxYYe54O