Final answer:
To find the average variable cost per unit of a product like coffee, divide the total variable costs by the quantity produced. If a coffee shop spends $200 on making 100 cups of coffee, the average variable cost is $200/100, resulting in $2 per cup.
Step-by-step explanation:
To calculate the average variable cost per unit of a product, such as coffee, you simply divide the total variable costs by the total output (quantity of coffee produced). Variable costs consist of expenses that change in proportion to the activity of a business. For instance, in the case of a coffee shop, the variable costs could include the cost of coffee beans, milk, sugar, and cups, which all vary depending on how many coffees are made.
For example, if a coffee shop incurred a total variable cost of $200 for making 100 cups of coffee, the average variable cost per cup of coffee would be calculated as follows:
- Determine the total variable cost of production. (In this case, $200)
- Determine the total number of units produced. (Here, 100 cups of coffee)
- Divide the total variable costs by the number of units produced to get the average variable cost per unit. (So, $200/100 = $2 per cup of coffee)
Understanding average variable cost is crucial for businesses because it helps in setting the appropriate selling price and in making economic decisions.