How to Calculate Average Variable Cost (AVC)
Average variable cost equals total variable cost divided by quantity: AVC = VC ÷ Q, which is the same as ATC minus AFC.
The Average Variable Cost formula
Calculator
Enter total cost, fixed cost and quantity to get AVC, plus the ATC minus AFC cross-check.
Everything the firm spends to produce this quantity, fixed plus variable.
Costs owed at every output level, such as rent and insurance.
Output the two cost figures belong to.
Each unit carries $15 of variable cost, so a price below that would not cover even the cost of making the unit.
- Total variable cost (VC)
- $360
- Average total cost (ATC)
- $20
- Average fixed cost (AFC)
- $5
- Variable share of total cost
- 75%
Subtracting fixed cost from total cost leaves $360 of spending that rises with output.
Total cost per unit is $20, which sits above AVC by exactly the average fixed cost.
The fixed cost spread over each unit is $5, and it shrinks at every higher output.
75% of this firm's spending moves with output, and the rest is owed whatever it produces.
How to calculate Average Variable Cost, step by step
- 1Separate variable costs from fixed costs. Variable costs rise with output (wages, materials, power); fixed costs like rent are owed at every output level.
- 2Find total variable cost. Use VC = TC − FC, or add up the variable inputs used to produce that quantity.
- 3Divide by quantity. AVC = VC ÷ Q, the variable cost carried by each unit produced.
- 4Cross-check against ATC. AVC should equal ATC − AFC at the same output level.
Worked example: Average Variable Cost
A bakery's total cost is $480 at 24 cakes and its fixed cost is $120, so VC = 480 − 120 = $360 and AVC = 360 ÷ 24 = $15 per cake. Checking the other way: ATC = 480 ÷ 24 = $20, AFC = 120 ÷ 24 = $5, and 20 − 5 = $15.
Average Variable Cost questions
Why is the AVC curve U-shaped?
Increasing marginal returns at low output pull AVC down, then diminishing marginal returns push it back up, which gives the curve its U shape.
What is the difference between AVC and ATC?
ATC includes fixed cost and AVC does not, so ATC sits above AVC by exactly AFC, and the gap between them narrows as output rises.
Why does a firm shut down when price is below AVC?
Below minimum AVC each unit sold fails to cover even its own variable cost, so producing loses more money than closing and paying only the fixed cost.
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