Final answer:
In systems calculating average cost, the cost per unit is found by dividing total cost by the quantity of output produced. The average cost offers the per-unit cost, while marginal cost considers the cost of producing one more unit. Both average and marginal costs are vital for businesses to assess profitability.
Step-by-step explanation:
In a system where the cost object is masses of identical or similar units of a product or service, the way to determine the cost per unit is through the average cost (AC) method. AC is calculated by dividing the total cost (TC) of production by the quantity (Q) of output produced (AC = TC/Q).
For instance, if producing two widgets costs a total of $44, the average cost per widget would be $44 divided by 2, equating to an average cost of $22 per widget.
Furthermore, businesses may evaluate the cost associated with producing an additional unit by computing the marginal cost (MC), which is the change in total cost divided by the change in output (MC = ΔTC/ΔQ).
A classic example would be if the first widget costs $32.50 and the second widget increases the total cost to $44, the marginal cost of the second widget would be calculated as $44 - $32.50, which equals $11.50.
Average total cost is computed for different levels of output and often depicted as a U-shaped curve on a graph. A firm that maintains an average cost of production below the market price can generate profits.