Classify and calculate production costs
Distinguish fixed and variable costs, calculate total and average cost, and use evidence in a decision.
Cambridge IGCSE Business 0264, 2027–2029 syllabus, Topic 4. Show working for calculations and state the assumptions behind production or cost decisions. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous operations study is assumed. Read the time period, output unit, cost data and operating constraints before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How is average cost calculated?
What you will learn
- Classify costs
- Calculate total and average cost
- Apply cost data to a simple decision
Classify the cost within a period
Fixed costs do not change with output within the stated range and period; variable costs change with the number of units produced. The classification can depend on the time period and capacity.
Total variable cost = variable cost per unit × number of units. Total cost = total fixed costs + total variable costs. Average cost = total cost ÷ number of units.
Use the right cost for the decision
Cost data can support choices about which product to produce, whether to continue output, which supplier to use or what price to set. Compare costs on the same basis and include relevant quality, capacity and revenue information when it affects the decision.
Average cost can fall as output rises when fixed costs are spread across more units, but variable cost per unit or other capacity costs may change. Do not assume that a higher-output plan is always cheaper overall.
Pause and explain
Fixed costs are $900 and total variable costs are $1,600. What is total cost?
Worked example
A business has fixed costs of $2,400 per month and variable cost of $6 per unit. It makes 500 units. Calculate total cost and average cost per unit.
Show the worked solution
- Total variable cost = 6 × 500 = $3,000.
- Total cost = 2,400 + 3,000 = $5,400.
- Average cost = 5,400 ÷ 500.
Answer Total cost = $5,400; average cost = $10.80 per unit.
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Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A maker has fixed costs of $3,000, variable cost of $8 per unit and produces 600 units. Calculate total variable cost, total cost and average cost.
Give me a hint
Multiply unit variable cost by output before adding fixed costs.
Compare my reasoning
- Total variable cost: 8 × 600 = $4,800.
- Total cost: 3,000 + 4,800 = $7,800.
- Average cost: 7,800 ÷ 600.
Total variable cost = $4,800; total cost = $7,800; average cost = $13 per unit.
Look for these in your work
- Variable cost total correct
- Total cost correct
- Average cost correct
A supplier quotes $4 per unit for 1,000 parts plus a one-off delivery fee of $300. Classify the quoted unit cost and calculate the total purchase cost for the order.
Give me a hint
Apply the quote to all units and then add the stated fee.
Compare my reasoning
- Unit purchase cost varies with the number ordered.
- 4 × 1,000 = $4,000.
- Add the $300 delivery charge.
The $4 per-unit charge is variable with the order quantity; purchase cost is $4,000 + $300 = $4,300, assuming the stated delivery fee applies to this order.
Look for these in your work
- Per-unit cost classified
- Multiplication correct
- Fixed order fee added
A business can continue a product that earns revenue of $6,000 with variable costs of $3,800 and fixed costs of $2,500, or stop production. Explain why the cost figures alone are not enough to decide.
Give me a hint
Compare contribution with avoidable and unavoidable costs and consider alternatives.
Compare my reasoning
- The product's contribution is 6,000 − 3,800 = $2,200.
- If all $2,500 fixed cost remains when production stops, stopping may not save it.
- Consider whether costs are avoidable and whether capacity has another use.
The product contributes $2,200 before fixed costs. If the full $2,500 fixed cost continues after stopping, discontinuing could worsen total results unless other benefits or alternative uses exist. The business needs to know which costs are avoidable and what else the capacity could produce.
Look for these in your work
- Contribution calculated
- Fixed-cost behaviour considered
- Decision information identified
Common mistakes
- Calling all costs fixed forever
- Adding fixed cost directly to per-unit variable cost without multiplying
- Dividing fixed cost by output and calling it total cost
What can you explain now?
How is average cost calculated?
Compare with the explanation
Total cost ÷ number of units
Average cost is cost per unit at that output.
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Make it stick
What is the difference between total cost and average cost?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.