What is Average Fixed Cost?
Average Fixed Cost (AFC) refers to the fixed cost incurred by a business for each unit of output it produces. Fixed costs are those expenses that do not change with the level of production — such as rent, salaries, and insurance.
As production increases, the AFC decreases because the same fixed cost is spread over more units. This is known as economies of scale.
Formula for Average Fixed Cost
The formula to calculate Average Fixed Cost is straightforward:
Formula:
Terms Explained
- Total Fixed Cost (TFC): The overall fixed cost of production. It remains the same regardless of the number of units produced.
- Number of Units (Q): The total number of items or units produced in a given time period.
Why is AFC Important?
Understanding AFC is crucial for:
- Pricing decisions: Knowing how much each unit costs helps in setting a profitable price.
- Cost control: Businesses can find ways to reduce fixed costs or increase production to lower AFC.
- Break-even analysis: It helps in determining the number of units that must be sold to cover fixed costs.
Example Calculation
Let’s say a company has a Total Fixed Cost of $10,000, and it produces 2,000 units. What is the Average Fixed Cost?
Step-by-step:
So, the Average Fixed Cost is $5 per unit.
Try It Yourself
Use our Average Fixed Cost Calculator by entering your Total Fixed Cost and the Number of Units Produced. Instantly get your AFC value and make smarter business decisions!
Conclusion
Average Fixed Cost is a powerful metric for businesses to assess efficiency and scale. As you increase production, your AFC decreases, giving you an edge in competitive pricing and profitability. Bookmark this calculator for quick cost analysis anytime you need it.
