Costs of production Cambridge IGCSE Business Studies (9–1) revision
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In plain words
Some of a firm's costs have to be paid however much it makes: the rent is due even if the factory stands idle. Others rise with every extra unit, like the flour in a bakery. Sorting costs into these two kinds is the first step in most business sums.
From them come total cost, and the cost of each unit.
5 things to know
- Fixed costs (FC) do not change with output: rent, insurance, loan interest, managers' salaries.
- Variable costs (VC) change with output: raw materials, packaging, wages paid for each item made.
- Total cost (TC) = fixed cost + variable cost.
- Average total cost (ATC) = total cost ÷ output. Average fixed cost (AFC) = fixed cost ÷ output. Average variable cost (AVC) = variable cost ÷ output.
- Average fixed cost always falls as output rises, because the same fixed cost is spread over more units.
Worked example
A firm has fixed costs of $600 a week and variable costs of $4 a unit. It makes 200 units. Find the total cost and the average total cost.
- Variable cost = 4 × 200 = $800.
- Total cost = fixed cost + variable cost = 600 + 800 = $1400.
- Average total cost = 1400 ÷ 200 = $7 a unit.
Tips and tricks
- At zero output, total cost is not zero. It equals the fixed cost.
- "Average" always means "divided by output". If you forget a formula, that gets you there.
It lands in your notebook with its questions as flashcards.
Costs of production: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which is a variable cost for a clothing factory?
More clothes need more cloth. The others stay the same whatever the output.
Fixed costs are $500 and variable costs are $1500. What is the total cost?
TC = FC + VC = 500 + 1500.
Total cost is $9000 at an output of 300 units. What is the average total cost?
9000 ÷ 300 = $30.
What is a firm's total cost when its output is zero?
Fixed costs must be paid even when nothing is produced.
Fixed costs are $1200. What is the average fixed cost at an output of 400 units?
1200 ÷ 400 = $3.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 7 marks. Write your answers on paper, then check them.
Costs of production
Cambridge IGCSE Business Studies (9–1) 0986 · 7 marks · papermunch.org
Name ______________________________ Date ______________
Give one example of a fixed cost and one of a variable cost for a pizza restaurant.[2]
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Fixed: rent of the building. Variable: flour and cheese.
A firm's fixed costs are $2400 and its variable cost is $6 a unit. Calculate its total cost and average total cost at an output of 400 units.[3]
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Variable cost = 6 × 400 = $2400. Total cost = 2400 + 2400 = $4800. Average total cost = 4800 ÷ 400 = $12.
Explain why average fixed cost falls as output increases.[2]
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The fixed cost stays the same and is divided among more units, so the amount for each unit gets smaller.
Answers: Costs of production
- 1. Fixed: rent of the building. Variable: flour and cheese.
- 2. Variable cost = 6 × 400 = $2400. Total cost = 2400 + 2400 = $4800. Average total cost = 4800 ÷ 400 = $12.
- 3. The fixed cost stays the same and is divided among more units, so the amount for each unit gets smaller.