Cost, revenue and profit measures
| English | Español |
|---|---|
| total variable cost/ˈtəʊtl ˈveərɪəbl kɒst/ | total variable cost |
| average total cost/ˈævrɪdʒ ˈtəʊtl kɒst/ | average total cost |
A decision you can investigate
- A craft workshop sells 150 boxes at 12 yuan each. Its fixed cost is 450 yuan and variable cost is 5 yuan per box.
- A price higher than unit variable cost does not by itself establish a profit.
Build the explanation
- Fixed costs do not change with output over the relevant period/range. Total variable cost 总可变成本 changes with output; with constant unit variable cost, TVC = unit variable cost × Q. Total cost TC = TFC + TVC.
- Total revenue TR = P × Q; average total cost 平均总成本 AC = TC/Q; profit = TR − TC. Keep totals in currency and averages in currency per item.
Work through the evidence
- Known: Q = 150, P = 12, TFC = 450 and unit VC = 5. TVC = 5 × 150 = 750 yuan; TC = 450 + 750 = 1200 yuan.
- TR = 12 × 150 = 1800 yuan; AC = 1200/150 = 8 yuan per box; profit = 1800 − 1200 = 600 yuan. The margin above variable cost first helps cover fixed costs.
What is total variable cost at 150 boxes?
TVC = unit VC × Q = 5 × 150 = 750.
Test the limits
- Do not subtract average cost from total revenue: their units differ. At zero output, TC can still include fixed cost, but TC/Q is undefined.
- Fixed does not mean unchanged for ever: rent or capacity can change when the period or scale changes. Distinguish the accounting period before interpreting a cost.
What is average total cost?
AC = 1200/150 = 8 yuan per box.
At zero output, average total cost is always zero.
TC/Q involves division by zero at Q = 0; fixed costs may still remain.
Apply and explain your answer
- Why can the workshop have total cost even at zero output?
- Its relevant-period fixed cost remains even when it produces no boxes.
Which formula finds profit?
Subtract the total costs from total revenue in the same period.
Use the terms precisely
- total variable cost: The aggregate cost varying with the quantity produced in the period.
- average total cost: Total cost divided by output.
Match the terms to their meanings.
Each term describes a specific mechanism in this lesson.
Known: Q = 150, P = 12, TFC = 450 and unit VC = 5. TVC = 5 × 150 = 750 yuan; TC = 450 + 750 = 1200 yuan. TR = 12 × 150 = 1800 yuan; AC = 1200/150 = 8 yuan per box; profit = 1800 − 1200 = 600 yuan. The margin above variable cost first helps cover fixed costs.
Do not subtract average cost from total revenue: their units differ. At zero output, TC can still include fixed cost, but TC/Q is undefined. Fixed does not mean unchanged for ever: rent or capacity can change when the period or scale changes. Distinguish the accounting period before interpreting a cost.
Fixed costs do not change with output over the relevant period/range. Total variable cost changes with output; with constant unit variable cost, TVC = unit variable cost × Q. Total cost TC = TFC + TVC.