Listen to a Business English Dialogue About Average cost
Johnny: Lydia, do you know what average cost means?
Lydia: No, what is it?
Johnny: Average cost is the total cost of producing a product or providing a service divided by the number of units produced or services rendered, giving you the cost per unit or service on average.
Lydia: I see. How is average cost useful in business?
Johnny: Well, businesses use average cost to determine the profitability of their products or services, as well as to make decisions about pricing, production levels, and resource allocation.
Lydia: Can you give me an example of how average cost is calculated?
Johnny: Sure, let’s say a company spends $10,000 on producing 1,000 units of a product. The average cost per unit would be $10,000 divided by 1,000, which equals $10 per unit.
Lydia: That makes sense. How does knowing the average cost help businesses make decisions?
Johnny: By comparing the average cost to the selling price of the product, businesses can determine whether they’re making a profit or a loss on each unit sold and adjust their pricing or production strategies accordingly.
Lydia: Are there different types of average costs?
Johnny: Yes, there are different types of average costs, such as average variable cost, which includes only variable costs like materials and labor, and average total cost, which includes both variable and fixed costs like rent and utilities.
Lydia: How do changes in production volume affect average cost?
Johnny: Generally, as production volume increases, average costs tend to decrease due to economies of scale, which means spreading fixed costs over a larger number of units.
Lydia: Thanks for explaining, Johnny. Average cost seems like an important concept for businesses to understand when managing their operations and finances.