The average cost per unit of output; calculated by dividing total costs with the level of output (eg no. of items produced). Total costs are made up of variable costs (eg materials, energy) and fixed costs (eg rent, interest payments on loans). Example: Fixed costs = £350,000. Variable costs = £450,000. Output = 200,000 units. Unit cost is £4. 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. The most efficient level of output is the output at which the unit (or average) cost is the lowest. The lower the unit cost: the more efficient (productive) the production process, the more profitable the business, and / or the more competitive the business can be on price. It should be appreciated, however, that although a reduction in unit costs is seen as desirable, it should not be at the expense safety or quality.