Final answer:
To determine the average cost per tractor, one must add the total fixed and variable costs, and then divide that sum by the number of tractors produced. The average variable cost can be calculated separately and is important for understanding profitability in relation to market price.
Step-by-step explanation:
To calculate the average cost per tractor, we need to consider both fixed costs and variable costs. The question does not specify the numerical amounts for each, but the method to find the average cost per tractor is the following:
- Determine the total fixed costs, which are constant and do not change regardless of the number of tractors produced.
- Calculate the total variable costs by multiplying the variable cost per tractor by the total number of tractors produced.
- Add the total fixed costs and total variable costs to find the total costs.
- Divide the total costs by the number of tractors produced to obtain the average cost per tractor.
The average variable cost is also an important concept, which is calculated by dividing the total variable costs by the number of units produced. This cost typically has a U-shaped curve. As production increases, the average variable cost decreases until it reaches a certain point, after which it starts to increase.
A sound understanding of these costs is crucial for a business to price its products competitively while ensuring profitability.