Final answer:
The most common method to allocate joint costs is in proportion to the relative sales value. Average variable cost is calculated by dividing variable cost by total output at each level of production and is usually U-shaped. A firm's profitability can be assessed by comparing its average variable cost to the market price, excluding fixed costs.
Step-by-step explanation:
The most common method to allocate joint costs is in proportion to the relative sales value of the products. This approach is preferred because it aligns the cost allocation with the ultimate value generated by the sale of the joint products, making it a fair method for most situations. Other methods, such as allocation by production volume, number of units, or variable costs, are less common and may not reflect the economic reality of how joint costs contribute to the value of each product.
We calculate average variable cost by taking variable cost and dividing by the total output at each level of output. Average variable costs are typically U-shaped, meaning they decrease up to a certain point as production increases, and then begin to increase as output continues to grow due to inefficiencies or increased variable input costs. If a firm's average variable cost of production is lower than the market price, then the firm would be earning profits if fixed costs are not considered. This provides insight into the profitability of a firm in the short run.
Measuring costs on a per-unit basis includes fixed costs, average cost, average variable cost, variable costs, and marginal cost. Understanding these various costs and production technology used by the firm is essential for any business to make decisions that maximize profits, especially in the long run.