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Explain Total Cost
Explain Total Cost
Total cost (TC) is the sum of all costs incurred by a business in producing a certain quantity of goods
or services. It includes both fixed costs and variable costs. Fixed costs are those costs that do not
vary with changes in production levels, such as rent, salaries, and insurance. Variable costs, on the
other hand, are costs that vary with changes in production levels, such as materials, labor, and
electricity.
To calculate total cost, a company needs to add up all of its fixed costs and variable costs. The
formula for total cost is as follows:
For example, suppose a company produces 10,000 units of a product in a month. Its fixed costs for
the month are 10,000, and its variable costs are 2 per unit. The total cost for the month would be:
TC = 10,000 + (2 x 10,000)
TC = 10,000 + 20,000
TC = 30,000
Average cost is a measure of the total cost per unit of output produced. It is calculated by dividing
the total cost of production by the number of units produced. The formula for average cost is:
For example, suppose a company produces 1,000 units of a product at a total cost of 10,000. The
average cost per unit would be:
Average Cost = 10
Marginal cost is the additional cost incurred by a company to produce one more unit of output. It is
the cost of producing one additional unit of a product or service.
For example, suppose a company produces 1,000 units of a product at a total cost of 10,000. If the
company produces one more unit, the total cost increases to 10,100. The marginal cost of producing
the additional unit would be: