To calculate the total cost from marginal cost and fixed cost, you need to understand the relationship between these costs. Here’s a step-by-step explanation:
- Understand the Components:
- Fixed Cost (FC): This is the cost that does not change with the level of output. Examples include rent, salaries, and insurance.
- Marginal Cost (MC): This is the cost of producing one additional unit of output. It changes with the level of production.
- Calculate Variable Cost (VC):
Variable cost is the total cost of producing a certain quantity of output, excluding fixed costs. To find the variable cost, you need to sum up the marginal costs for each unit produced.
Formula:
VC = ΣMC - Calculate Total Cost (TC):
Total cost is the sum of fixed cost and variable cost.
Formula:
TC = FC + VC
Example:
Suppose a company has a fixed cost of $1,000 and the marginal costs for producing 5 units are $100, $150, $200, $250, and $300 respectively.
- Calculate the variable cost:
VC = $100 + $150 + $200 + $250 + $300 = $1,000 - Calculate the total cost:
TC = $1,000 (FC) + $1,000 (VC) = $2,000
So, the total cost of producing 5 units is $2,000.