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Average cost

The cost of producing one unit or service one customer; calculated by dividing total costs by the level of output. Total costs are made up of total variable costs and total fixed costs. For example: If fixed costs = £350,000, variable costs = £450,000, and output = 200,000 units, then the average cost of producing each unit is £4.00. If the level of output is anything other than 200,000 units, then the unit cost might be very different. In part, this is because fixed costs do not change (in the short run at least) with the level of output. As output rises, the fixed costs are divided over a larger volume of output and this can lower unit costs. Obviously, if output was lower than 200,000 the fixed costs would be spread over a lower volume of output and this can increase unit costs.

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