What is the Average Fixed Cost?
The Average Fixed Cost (AFC) is the fixed cost which doesn’t change with the change in some number of goods and services produced by a company. To put it in a nutshell, AFC is the fixed cost per unit and is calculated by dividing the total fixed cost by the output level.
AFC is only for a short run, as no-cost is fixed for a long time. When the unit produces increases, the AFC per unit decreases, similarly, when the business produces less unit, the average cost increases per unit.
However, only one unit, mostly capital, is fixed. Examples of AFC are permanent employees salaries, the mortgage payment on machinery and plant, rent, etc.,
Average Fixed Cost Formula and Example:
AFC = Total Fixed Cost / Output (Q)
If the fixed cost of a pen factory is ₹. 5,000/- and it produces 500 pens, then the average fixed price will be ₹. 10/- unit. Similarly, the factory produces 1000 pens than the cost per unit will be ₹. 5/- and if the total production is 5000 pens than the price will come down to ₹. 1/- unit.
So the above example explains that no matter what the output of the product is the cost remains the same, i.e. ₹. 5000/- remains the same whether the production is 500 or 5,000.
Average Fixed Cost (AFC) in a diagram:
In the above example, the cost of the product starts to fall with the increase in production. The pen per unit started at the price of ₹. 10/- decreased to ₹. 1/-. The average fixed cost decreases with the rise in the output, however, the capital ₹. 5,000/- remain fixed.
Also Read: Important Questions for Production and Costs
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