How is unit cost calculated?

The calculation of unit cost is fundamentally about understanding the total cost associated with producing a specific quantity of goods. The correct approach to determine the unit cost involves summing the total fixed costs and the total variable costs associated with producing that quantity, and then dividing by the quantity produced.

The first choice takes into account fixed costs and variable costs efficiently: it states that the total cost consists of fixed costs added to the product of quantity and variable cost (this represents the total variable cost for the quantity produced). By dividing this total cost by the quantity, you derive the unit cost.

In contrast, the second choice simplified the relationship by treating total costs (fixed plus variable) as an aggregate, but it does not clearly isolate the variable component per each unit as effectively.

The third option incorrectly suggests that you subtract variable costs from fixed costs before multiplying by quantity, which does not accurately represent the cost behaviors typically involved in unit cost calculation.

The fourth choice also introduces a misunderstanding by implying you should divide the product of quantity and variable cost by the sum of fixed costs and quantity, leading to a distorted perspective on how costs behave in relation to units produced.

Thus, the first choice is the most accurate representation of how to calculate unit cost by ensuring both fixed and variable