Question

Steve owns a bike store. His total costs are $1.2 million per year, his variable costs are $750,000, and his fixed costs are $450,000 per year. Last year, Steve sold 1,200 bikes. Steve’s average variable cost was __________ per bike.

Answer 1

Divide variable costs by output. Therefore, it would be 750000 divided 1200, giving you $625.

Answer 2

Variable cost means a cost that changes with the change in the output. The total variable cost changes with the change in the number of units produced but the variable cost remains fixed per unit.

Steve Total Variable Cost = $750,000

Steve's average Variable Cost = Total Variable Cost ÷ Number of Bikes Sold

Steve's Average Variable Cost = $750,000 ÷ 1200

Steve's Average Variable Cost = $ 625 per bike