Average fixed cost (AFC) is obtained by dividing the total fixed cost and the number of produced units. It demonstrates how fixed costs per unit reduces with increment in production. The formula is:
AFC = TFC / Quantity of Output.
For instance, in the case of total fixed costs of $10,000 and 1,000 units produced, AFC is $10. This idea enables businesses to appreciate how well they’re distributing fixed costs regarding production. When output increases, AFC decreases, increasing cost effectiveness and profitability.