Understanding Cost Elements of a Business: Calculation, Break-Even Point, and Diminishing Returns

Running head: COST ELEMENTS OF A BUSINESS
Cost elements of a business
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1COST ELEMENTS OF A BUSINESS
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................3
Question 3..................................................................................................................................3
Reference....................................................................................................................................5

2COST ELEMENTS OF A BUSINESS
Question 1
When total costs (TC) are known –
(a) Fixed cost (FC) = Total cost – Variable costs
(b) Variable cost (VC) = Total cost – Fixed cost
Calculation of variable cost – variable cost is the cost that varies in the proportion with the
services or volume of goods produced by the business. It is calculated through multiplying
the total output quantity by variable cost per output unit (Kaplan & Atkinson, 2015). For
example, if variable cost per unit is $ 10 and total output unit is 20 unit, variable cost = $ 10 *
20 = $ 200. However, if the unit increases to 25, variable cost = $ 10 * 25 = $ 250.
(c) Average variable cost (AVC) = Variable cost / quantity
Calculation of average variable cost – AVC is computed though dividing total variable cost
(TVC) by number of output units (Lew, Pacana & Kulpa, 2017). For example, if TVC = $
200 and the number of output units are 20, AVC = $ 200 / 20 = $ 10 per unit.
(d) Average total cost (ATC) = Total costs / quantity
Calculation of ATC = total cost (TC) is the sum of total variable cost and total fixed cost.
ATC is computed through dividing TC by number of output units or quantity (Kaplan &
Atkinson, 2015). For example, if TC is $ 1000 and number of output units are $ 50, ATC = $
1000 / 50 = $ 20.
(e) Average fixed cost (AFC) = Fixed cost / quantity
Calculation of AFC – AFC is computed though dividing total fixed cost (TFC) by number of
output units (Lew, Pacana & Kulpa, 2017). For example, if TFC = $ 2000 and the number of
output units are 20, AFC = $ 2000 / 20 = $ 100 per unit.