Total Cost and Quantity Data

Q TC
0 130
1 250
2 390
3 600
4 840
5 1200

Marginal Cost

Marginal Cost is the cost a company incurs when producing one

more good. Suppose we're producing two goods, and we would
like to know how much costs would increase if we increase
production to three goods. This difference is the marginal cost of
going from two to three. It can be calculated by:

Marginal Cost(2 to 3) = Total Cost of Producing 3 – Total Cost of

Producing 2.

Looking at our data, it costs 600 to produce three goods and 390
to produce two goods. The difference between the two figures is
210, so that is our marginal cost.

Total Cost

The total cost is simply all the costs incurred in producing a

certain number of goods. That question is easy to answer here,
as we can just read it off of our chart. So the total cost of
producing three goods is 600 and the total cost of producing five
goods is 1200.

Fixed Cost
Fixed costs are the costs that are independent of the number of
goods you produce, or more simply the costs you incur when you
do not produce any goods. We see from our chart that when we
produce zero goods our costs are 130. So our fixed cost of
production is 130.

Total Variable Costs

These are just the opposite of fixed costs; these are the costs
that do change when we produce more. We calculate the total
variable cost of producing 4 units by:

Total Variable Cost of Producing 4 units = Total Cost of Producing

4 Units – Total Cost of Producing 0 units.

In our case it costs us 840 to produce 4 units and 130 to produce

0. Then our total variable costs when we produce 4 units is 710
since 810-130=710. Similarly our total variable costs when we
produce 5 units is 1070.

Average Total Costs

Our average total cost is our fixed costs over the number of units
we produce. So if we produce five units our formula is:

Average Total Cost of Producing 5 = Total Cost of Producing 5

units / Number of Units

With our data we have an average total cost of producing five

units of 200, as the total cost of producing five units is 1200 and
1200/5 = 240. The average total cost of producing four units is
210 as 840/4 = 210.

Average Fixed Costs

Our average fixed cost is our fixed costs over the number of units
we produce, given by the formula:

Average Fixed Cost = Fixed Costs / Number of Units

So our average fixed cost of producing five units is our total fixed
costs (130), divided by the number of units (5), which gives us
an average fixed cost of producing five units of 26 (26 = 130/5).
Similarly the average fixed cost of producing two units is 65 as
130/2 = 65.

Average Variable Costs

As you might have guessed, our formula for average variable

costs is:

Average Variable Cost = Total Variable Costs / Number of Units

We saw that the total variable cost of producing four units is 710
and 870 for six units. Then the average variable cost of
producing four units is 177.5 (710/4) and the AVC of producing
five units is 214 (1070/5).

Example. The Getalife Nutrition Company produces one

basic health supplement. Its ingredients are guano, oregano
and glue. Each supplement requires the use of an industrial
sized blender-mixer and a machine that fabricates the
supplement into capsules. Each machine must be operated
by a skilled operator. The machines and their operators
require factory space which must be rented and machinists
must be supervised.

As a rule the company sells its supplement only under its

own label. Towards the end of its fiscal year the mega
grocery chain, Up Against the Wall Mart, has expressed
interest in purchasing a large order to be marketed under its
Sham store label.

Moe, the comptroller, Larry, the plant manager and Curly,

the lead machine operator get together to consider the
minimum price they should accept.. They begin their
analysis by looking at the following historical production cost
information.

For the following questions, describe how you used the formula to arrive at the answer?

What is the total cost of production?

What is the amount of fixed costs for Getalife?
What is the amount of variable costs for Getalife?
What is the average fixed cost per unit for Getalife?
What is the average variable cost per unit for Getalife?
What is the total cost of production per unit for Getalife?
With average cost per unit = ______, should the order be accepted?
Support your answer with reasons.