Average Total Cost

Published Dec 23, 2022

Definition of Average Total Cost

Average Total Cost (ATC) is defined as the total cost of production divided by the number of units produced. That means it is the average cost of producing one unit of a good or service. It includes both fixed and variable costs, such as labor, materials, and overhead.

Example

To illustrate this, let’s look at an imaginary company that produces widgets. The company has a fixed cost of USD 10,000 per month for rent and other overhead. In addition to that, it spends USD 2.00 per widget for materials and labor. Now, if the company produces 1,000 widgets in a month, its total cost adds up to USD 12,000 (i.e., 10,000 + 2,000). As a result, its average total cost is USD 12.00 per widget (i.e., 12,000/1,000).

Why Average Total Cost Matters

Average Total Cost is an important concept for understanding the cost structure of a business. It helps managers to identify the most cost-effective production methods and make better decisions about pricing. For example, if the ATC of a product is USD 10.00 and the company wants to make a profit of USD 5.00 per unit, it should set the price at USD 15.00.

In addition, ATC is also a useful tool for analyzing the competitive environment of a market. For instance, if the ATC of a company is higher than its competitors, it may be difficult for it to compete in the long run. That’s why it’s important for companies to keep their ATC as low as possible.