Average Fixed Cost

Average fixed cost is the fixed cost per unit of output.

Fixed cost is a cost which does not change in the short run with increase or decrease in the production level. Examples include depreciation on factory building, salaries of permanent employees, rent paid on non-cancelable lease, etc.

Formula

Average Fixed Cost = Total Fixed Cost
Total Units of Output

Example

Sucrose Farms is engaged in cultivation of sugar cane. They have hired 3 workers on a one-year contract which is non-cancelable. They pay a salary of $25,000 per annum to each worker. They have also hired some farming equipment for which they pay $60,000. The depreciation they charge on the farm building and the farm fencing is $20,000 per annum. They have to apply insecticides and pesticides which costs $1,000 per square kilometer. The business' total output is 120 tons of sugar cane. Find its fixed cost.

Sucrose Farms total fixed cost is $155,000 (($25,000 × 3) for labor, $60,000 on account of farming equipment rent and $20,000 on account of depreciation). Its total production is 120 tons. This gives us an average fixed cost of $1,292 per ton ($155,000/120).

Please note that the cost of pesticides is not a fixed cost because it varies with the change in production level.

Written by Obaidullah Jan